Indices Mysteries

With no one to steer the course, a ship is like an unbridled horse.
Any system will rot to naught without a leader at the helm to direct
Valsa George “Captaincy”

Where is Jerome Powell? An inflation number was reported last week. Who cares? The Federal Reserve is meeting next week, and they may vote to raise interest rates further. Ho hmm. We were supposed to have had a banking crisis six weeks ago and since then the esteemed chairman seems to have gone missing. Certainly, things seem to have gone silent. The stock market couldn’t even make it to the front page of the Wall Street Journal’s April 28th edition having to settle for page B1 with the rather insipid headline “U.S. Stocks Advance for Two Months In a Row”. Insipid but nonetheless true as the S&P 500 rose 1.6% for the month making a new high for the year with a return of 9.2% for 2023 to date. Perhaps more than any year in recent memory though this is a market that is confoundingly difficult to measure with the Dow Jones Industrial Average rising 2.5% but the Nasdaq Composite barely positive with a return of only 1/10 %.

Temperature is measured by Fahrenheit or Celsius and distance by English or Metric systems, but the tools used to measure stock market performance are much more varied and potentially more confusing. For much of the past one-hundred years the Dow Jones Industrial Average was the preferred measure of US stock market returns but in the past several decades it has been superseded by the S&P 500 which is a “basket” of stocks actually numbering 503. Each of those individual stocks weighting in the index is based upon the current value of that company’s publicly traded shares, commonly referred to as capitalization, with the largest company in the index, currently Apple at 7.25%, and the smallest First Republic Bank at 1/300 of 1%, meaning that a price movement in Apple has 2,227 times the effect upon the S&P 500 than does First Republic Bank. The three most commonly used categories of stock market capitalization are large-cap, companies with a capitalization of $10 billion or more, mid-cap with companies between $2 billion and $10 billion and small-cap, companies from $300 million up to $2 billion. The shares of those three as a percentage of the total US stock market are 70%, 20% and 10% respectively. Note that the S&P 500 is composed of 84% large-cap and 16% mid-cap so as an index it modestly underweights mid-cap stocks and excludes small-cap stocks entirely.

The reason for taking this detour into the somewhat technical is that it leads to a rather large point which is that the indices we use to measure stock market returns are currently giving extremely varied rates of return and thus make it difficult to answer a seemingly simple question, “how is the stock market doing” and, more specifically, those indices became particularly confusing at two specific times, the release of an extremely surprising and positive employment number in early February leading to concerns about the likelihood of further fed interest rate increases and the “banking crisis” in mid-March. Examples abound but we’ll satisfy ourselves with the sharing of a modest number. A different variation of the S&P 500 is an equal cap weighted version with each stock in the index having an equal influence on its resulting value. From the start of the year through March 3rd the “normal” S&P 500 was +5.69% and the “equal weighted” version +5.56%. From that date through the end of April the returns are +3.29% and -2.74%. In the first paragraph the variances in the returns of the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite were noted. Year to date through month’s end those returns are 9.2%, 3.5% and 17.1%. Commonly used indices used to measure small-cap and mid-cap stock performance are the S&P 600 and the S&P 400 respectively. On February 2nd those indices were significantly outperforming the S&P 500 with returns of 13.8% for the 600, 12.3% for the 400 and 9% for the 500. From that date through April those returns are -12% for the 600, -7.6% for the 400 and -1.1% for the 500.

The variances in stock market returns also manifest themselves in the returns between different sectors of foreign markets and the US market as well. An index used to measure the performance of foreign developed markets (Japan, England, France, Switzerland, Germany etc.) is the MSCI EAFE. On January 19th EAFE was outperforming the S&P 500 by 5%. On February 6th those returns were virtually identical. On March 10th EAFE was again outperforming by 5%. On March 21st they were the same. As of the end of April EAFE is outperforming by 2.6%. German, French, Spanish and Italian stock markets are positive through April between 17.6% and 19.2% with French stocks outperforming the S&P 500 by 10%. China’s stock market was up 17.2% on January 27th, 11% more than the S&P 500%. Since that date through April China’s down 15.3% with the S&P 500 +3%. So, there we have it. If we knew what it all meant it wouldn’t be a mystery but it is and so we don’t. Though shrouded in mystery, our wager is still on the bullish side.

For 60 (equity)/40 (fixed income & cash) April was a walk on the mild side with the equity share +1.8% and the fixed income & cash returning -1% due to a modest rise in interest rates resulting in a +.40% for the month and approximately 3% year to date. For three months portfolios have acted like a teeter totter with moderate ups and downs leaving returns close to neutral.

Mark H. Tekamp/May 5, 2023