U.S. Stock Market Has Been Doing Better Than Most Stocks
That’s a confusing concept, but it is reality. Over the latest five years, as measured by the Standard & Poor’s 500 Index, the stock market has gained 106%. The S&P 500 Index is generally considered to be a good representation of the U.S. stock market as a whole, but it most certainly is not.
Why? Because five companies (Apple, Amazon, Microsoft, Facebook, and Google) combine to make up nearly a quarter of the index. As these five go, so goes the index. If this index is viewed with all companies measured on an equal basis, the net result for the period drops to 87%.
The comparison is even more striking when we divide the S&P universe into large cap, midcap, and small cap companies. (Cap is short for market capitalization, which is the total value of all shares of a company.) Over the latest five years, the gain in large caps was 171% compared to 84% for midcaps and 77% for small caps.
This was an atypical performance since small caps and midcaps have significantly outperformed the market as a whole over extended periods of time. Given the dichotomy of the latest five years, it would be reasonable to expect that a return to the traditional comparison will take place as we move ahead.
The disparity becomes even more dramatic when comparing U.S. stocks to international stocks generally and emerging market stocks specifically. Over the latest five years, the gains in the U.S. market were nearly three times those of both international stocks and emerging market stocks.
Where are we today? The U.S. stock index (albeit heavily influenced by the giant tech companies) remains toward the upper end of its historical valuation range. Current valuations, however, are skewed on the high side at least partially due to comparisons with 2020 numbers, which were substantially undermined by the effects of the pandemic.
As we move ahead, comparisons will become far less impressive. That will be even more so if prospective federal government infrastructure plans are squeezed and if consumers continue to pull back from their recent spending spree. Based on the latest personal savings numbers, the latter appears to be the case.
Next year will probably be a time of more normal economic progress. Although the recent recovery boosted quarterly comparisons into the high single digits, it seems likely that the overall rate of gain will settle back toward 3% to 4% and perhaps even slower.
Given that likelihood, it would be reasonable to expect that gains for the U.S. stock market will moderate as well. The flip side, however, is that emerging markets, which over time have climbed at a well above average pace, will start regaining strength.
Until there’s reassurance that the effects of the pandemic are largely in the rearview mirror, the atypical performance of stock markets, both here and abroad, may continue.
Sound Asset Management Inc.
Weston, CT 06883
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