You know Your Survival Guy has warned about the truth behind the S&P 500. A handful of big stocks pushing performance in one direction, while the remainder go a different way depletes the index’s diversification. Diversification is discipline, and the further distorted the index becomes, the less diversified it is. At Barron’s, Nicholas Jasinski discusses how the market is treating bigger as better. He writes:
The S&P 500 briefly moved into position for a record close on Thursday, marking a gain of about one-third since it hit bottom in October 2022.
Bigger was better during the rally, which took the market benchmark as high as 4798.50 in morning trading. The gains were driven first and foremost by the most valuable companies on the market. Moves in semiconductor and software shares, plus an eclectic mix of healthcare, industrial, and travel stocks, rounded out the rebound.
The S&P 500’s most recent record close, at 4797 points, was on Jan. 3, 2022, near the beginning of a rotten year for the index. The benchmark index fell 25% through Oct. 12, 2022, to 3577, before bouncing back to finish 2022 at 3840, down 19% on the year.
2023 was a different story: The S&P 500 ended the year with a gain of about 24%. It took a gain of 1220 points, or 33%, from its October 2022 low to return to its record high.
It hasn’t been a rising tide that lifted all boats. About a third of S&P 500 stocks have beaten the index since it hit bottomed late in 2022. But that list of winners includes several of the largest companies in the S&P 500. The index is weighted by the market capitalizations of its components, so the moves in those big stocks pushed it higher.
A look at stocks’ levels on Thursday morning shows what has happened. Nvidia—the poster child for the artificial intelligence revolution—rose 379% since its October 2022 low, lifting its market capitalization to $1.3 trillion from some $275 billion. That rise added 130 points to the S&P 500, or nearly 11% of the index’s 1220-point rally back to its prior record closing high.
Action Line: Keep a close eye on diversification in your portfolio. When you need help, I’m here. Click here to subscribe to my free monthly Survive & Thrive letter.
