The increase in the stock market averages were driven by huge gains in only a few ultra-popular stocks. I was suspicious of that since it reminded me of 1999-2000 (and also the “Nifty 50” of the 1960s). Because most S&P 500 index funds are cap-weighted, this forced these funds to have a greater and greater proportion of the funds in fewer stocks.
The “FAANG” stocks (Facebook, Apple, Amazon, Netflix, Google) were too richly priced for my taste. To avoid them, I chose dividend-yielding funds which were guaranteed to have slower growth than an SPX index fund but also more diversified.
(Some people will say I was nuts to do this but it was a personal choice based on aversion to high volatility.)
https://www.wsj.com/articles/stock-market-is-top-heavy-but-c…
**Stock Market Is Top-Heavy, but Carnage Is Widespread**
**As former highfliers including Microsoft, Apple and Amazon falter, broader market feels pain**
**By Karen Langley, The Wall Street Journal, May 19, 2022**
**Apple Inc., Microsoft Corp. , Amazon. com Inc., Tesla Inc. and the parent companies of Google and Facebook swelled to be so big in recent years that they accounted for 25% of the S&P 500 heading into 2022. The benchmark U.S. stock index is weighted by market value, which means the biggest companies have the most influence. Together with Nvidia Corp. and Netflix Inc., they are responsible for 49.6% of the benchmark’s 2022 losses through Tuesday on a total-return basis, according to S&P Dow Jones Indices. ...Netflix has declined 71%, and Facebook parent Meta Platforms Inc. and Nvidia are down 43% and 42%, respectively. The other five stocks have dropped between 21% and 36%....**
**A version of the S&P 500 in which each stock is assigned an equal weighting is down just 13% in 2022....The stocks supporting the S&P 500 this year have been Exxon Mobil Corp. , Chevron Corp. and ConocoPhillips, along with Merck & Co. and AbbVie Inc. , according to S&P Dow Jones Indices. ...** [end quote]
A chart with the article shows that the percentage-point contribution to the S&P 500’s 13.7% decline
in total return (until 2 days ago) was exactly half from 8 stocks – Microsoft, Apple, Amazon, Alphabet, Meta, Tesla, Nvidia and Netflix – and the other half from all the other losing stocks combined. Today, the YTD loss on a total return basis is 17% – quite a drop in only 2 days.
Will the high-fliers return to their bubble valuations in the foreseeable future? If the Fed doesn’t return to its emergency pandemic negative real interest rates? If the economy doesn’t have another Covid shutdown where everyone is forced to sit at home all day?
Take a look at the 2000 tech-bubble peak before answering that question.
https://www.multpl.com/shiller-pe
Wendy