Investment Strategy Quarterly
Investment Strategy by Chief Market Strategist Larry Adam
Weekly Market Commentary
Bond Market Commentary
Gleanings - Published by Raymond James & Assoc.Economic Outlook
Understanding Investor Access
What a win! With Tuesday’s victory over Iran, the U.S. Men’s National Soccer team advanced past the World Cup group stage for the first time since 2014 and will play tomorrow versus the Netherlands at 10 a.m. ET. It was an exciting game, but probably more so than it needed to be. Why? A change in tactics. To start the game, the U.S. played an aggressive attacking style – leading to scoring chances and the lone goal of the game. But in the second half, the U.S. took a different approach, playing more defensively to preserve its lead. While the U.S. won 1-0, the strategy shift was nerve-wracking as Iran had several goal chances to close the game. For a soccer enthusiast, knowing these nuances adds a level of appreciation to the game. The same can be said for investors in understanding the nuances of the equity market indices.
The Calculation of Each Index | The Dow is 30 companies versus the S&P 500’s 505 companies. However, the Dow is a ‘price’ weighted index, while the S&P 500 Index is a market-capitalization-weighted index. This means for the Dow that higher ‘priced’ stocks (e.g., UnitedHealth at $537/share has a ~4 times larger impact than Apple at $147/share) have a larger weighting and impact on the price swings of the overall Index. In comparison, the S&P 500 uses the market cap of each company (e.g., Apple, Microsoft and Amazon are the largest companies) to determine its weight within the Index.
The ‘Player’ Score this Year | For the Dow, 13 of the 30 companies have had positive performance year-to-date. Because some of these are higher ‘priced’ stocks, they represent ~60% of the Dow. In contrast, these same stocks only represent 9% of the S&P 500. A higher exposure to these positive performing companies has supported the Dow’s outperformance.
Sector Composition Differences | The sector composition of each Index also plays a large role in performance dispersion. For example, the Dow has a higher weighting to some of the relative outperforming sectors year-to-date such as Health Care, Industrials and Financials, whereas the S&P 500 has higher exposure to the underperformers such as Tech and Communication Services. For example, Health Care, which is up 0.2% year-to-date, has a 21% weighting in the Dow, but a 15% weighting in the S&P 500. On the flip side, Communication Services has a 2% weighing in the Dow but an 8% weighting in the S&P 500.
Bottom Line | Understanding the nuances of equity indices enhances your market insights. As dispersion is expected to remain high around the Fed tightening cycle and a potential recession, performance differences and opportunities are likely to continue.
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