Skip to main content

How’s The Market?  Which One?

The first question is fairly common.  The second question is quite rare.  Why?  Because there are numerous stock market indexes and from the narrowest to the broadest there is a huge difference in the stocks included and their returns.

The best-known index is the Dow Jones Industrial Average, which is composed of 30 of the largest U.S. companies.   The Dow, like most other indexes, is a biased reflection of market performance.  The obvious reason is that it is a small sample, albeit that of the largest companies.  Less obvious, but more important, is that the index movements are primarily driven by the higher priced stocks in the group.

Professional investors pay more attention to the Standard & Poor’s 500 Index, the movements of which often vary substantially from those of the Dow.  The S&P is weighted by the market value of the companies’ shares, which means that the biggest companies in the group have the greatest impact.  In recent years, major technology companies such as Meta (née Facebook), Apple, Amazon, Netflix, and Alphabet (née Google) have been the main engines for gains.

A more accurate portrayal of how the S&P has been doing is seen by viewing the Invesco S&P 500 Equal Weight exchange-traded fund, which equally weights all the companies included, so the changes in the prices of the smallest companies have the same impact as those of the giants.

The ProShares S&P 500 Ex-Technology exchange-traded fund takes this one step further by measuring the S&P 500 without the 70 technology companies that are in the index.  That slices off about 30-35% of the aggregate value of the companies covered, but it also shows that the typical returns from most stocks are far lower.

Rather than narrowing, Vanguard’s Total Market Index exchange-traded fund includes a total of 4,124 different stocks.  Even broader is the Wilshire 5000 Index Fund, which (no surprise) includes 5,000 stocks.

From top to bottom, the returns over the latest five years have differed greatly.  The top returns were from the S&P 500 and the Total Market Index, both of which had a massive tech bias.  The lowest returns were from the Dow and the S&P 500 ETF ex-the tech stocks.  The gains for the latter pair were about one-third lower than for the top two.

So when someone asks you about the market, you need to ask which one.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

 

 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: September 30, 2026

Now what? For many women, there comes a time when financial confusion reigns.   It may come after a spouse passes or a marriage goes off the rails.   It’s the same situation for women who never married. The questions are many.   The answers may be few.   Toward the top of the list of concerns is the issue of understanding.   Although there are always complex matters, it’s essential that all of the elements are clearly presented in a straightforward fashion.   There’s more.   Presentation is one thing, but comprehension is another. If there’s a question, it must be asked.   Clarity is the key.   Don’t just say I get it when you don’t.   And, it’s essential to grasp how each of the items fits in the overall situation. In the absence of understanding, no decisions will be made. Here are some of the most pressing questions? What’s the smart way to handle my investments? Where should I go for advice? A bank, stockbroker, attor...
Post a Comment
Read more

Sound Advice: September 19, 2026

Is AI good news or bad news for investments? AI is potentially very good news for investors—but not automatically good news for every investment . The key distinction is between AI as an economic technology and AI stocks at today's prices . As of September 2026, there are compelling reasons for both optimism and caution: The bullish case: AI spending remains enormous. Gartner estimates global AI spending at $2.7 trillion in 2026 , up 49.5% year over year. If AI produces sustained productivity gains, corporate profits could expand well beyond the companies currently selling AI hardware. The valuation case: Investors have already priced in a lot of success. Valuations of major AI companies are elevated and expected long-term earnings growth is well above historical norms. The spending-risk case: The five largest hyperscalers are expected to spend more than $1 trillion on AI-related capital expendit...
Post a Comment
Read more

Sound Advice: October 14, 2026

Why your adviser must be a fiduciary   You should insist that your financial adviser be a fiduciary because a fiduciary is legally obligated, when acting in a fiduciary capacity, to put your interests ahead of their own and manage conflicts of interest appropriately. Key reasons: Your interests come first. A fiduciary duty requires the adviser to act in your best interest rather than simply recommending something that is suitable or profitable for them. Fewer conflicts of interest. Some advisers can receive commissions, bonuses, or other compensation for recommending particular investments or insurance products. A fiduciary must address material conflicts rather than allowing them to drive the recommendation. Greater transparency. Fiduciary advisers generally have obligations concerning disclosure, fees, conflicts, and how they are compensated. That makes it easier for you to understand what you're actually paying. Better alignment over the long term. A good adviser sh...
Post a Comment
Read more