Financial Insights

Make Your Peace with the S&P 500

Going through life searching for happiness can certainly bring some disappointment.  But going through life searching for meaning and purpose can bring serenity.  This can also be true with investing.  The purpose of your portfolio will determine the level of serenity you are having this year as the S&P 500 is treating investors quite differently depending on what you are searching for.

For investors looking for growth and willing to be a bit concentrated, the S&P 500 is repaying them handsomely. Right now, a concentration in certain large tech stocks has raised portfolios and the S&P 500 to new highs.  Yet why aren’t many investors finding happiness?  This is because the purpose of their portfolios might not be placing bets on a handful of stocks, but rather to be properly diversified which the S&P 500 Index is not.

Six large cap tech stocks currently make up 22% of the capital weighted S&P 500 index and ultimately are driving the index’s return.  Through July 24th Microsoft, Facebook, Apple, Amazon Netflix and Google (Alphabet) as a group (MFAANG) has returned 32.2% year to date, while the other 494 companies in the S&P 500 have eked out a -9.6% return.  This concentration has worked for the index and certain growth investors but not for the diversified investor.

MFAANG vs. S&P 500 through 7/24/2020

                              YTD Change    Weights         2020 P/E        2021 P/E

MFAANG                 32.2%                  22.2%                 63.1                 40.0

Non-MFAANG      – 9.60%                  77.8%                14.7                 14.0

S&P 500                – 0.30%                                             25.5                 19.8

Source: Advisors Capital Management

While we watch the market cap weighted S&P 500 index rise due to the large cap tech stocks, the diversified investor is not participating in this concentration.  These investors find their reasonably weighted portfolios stuck in the mud while the S&P 500 index with MFAANG and other expensive tech stocks push through this pandemic and arguably prosper.

Remember happiness is not a right in life.  Purpose can find you serenity.  What is the purpose of your investments?  If it is alpha or growth, then by all means you can concentrate your holdings and hope for the best.  Just make sure you have time because while concentration can make you rich, the purpose of diversification is to keep you rich.

This year the S&P 500 has provided a lot less love for diversified and income-oriented investors.

To illustrate how your portfolio’s purpose will determine your happiness we will look at the S&P 500 from three different perspectives.

Year to Date (July 24,2020) S&P 500 vs. RSP and SPYH

Source: Yahoo Finance

The blue line is the S&P 500 Index with all its heavily weight large cap tech, little income glory, rising to an incredible – 0.47% YTD while 32 million remain unemployed and the economy is on hold.  Investors that have the time and the risk parameters to accept the level of concentration this index provides are living large and feeling quite brilliant.  Yet this index does not represent the broad economy and the profitability of most U.S. companies.

The green line is the equally weighted S&P 500 represented by (RSP).  Here is where the risk conscience investors reside.  Prudent allocations amongst all; not taking too much risk in any one stock.  These folks are not feeling great right now because their diversification has them still underwater for the year -7.54%.  Being diversified never felt so bad.  But remember, if the purpose of your equity investments is to participate without trying to dominate, then this is your zip code right now.

The red line is the high dividend stocks of the S&P 500 as represented by (SPYD).  These investors are still knee deep in a bear market.  A reflection of the true economy and the companies and industries that provide high yield.  The group is down -27.6% YTD and their dividends have been challenged.  Here is where many retired investors have much of their assets if they need to live off the income of their investments.  These investors are scratching their heads uttering “but dividend stocks are stable right?”.

Hope is not lost.  We did see a dress rehearsal of what can happen when the market decides that we might just get through this crisis.  Between May 8th and June 8th, it looked like the United States was getting COVID under control. Infections where waning and states where opening.  There was a clear shift from the tech heavy S&P 500 to the rest of the market as seen below.  During this short period SPYD and RSP outperformed the S&P 500 19.4%, 18.0% to 12.2% respectively.  Investors began to get out of the higher P/E tech companies in search for value.

May 8th to June 8th2020: S&P 500 vs. RSP and SPYH

Source: Yahoo Finance

No one knows when this shift will take place again. It will be when the market believes that we can beat this pandemic through prevention and medical advancement.  But until then, your portfolio’s objectives will determine which part of the S&P 500 you will reside in (See “You Can’t Retire on an Index”).  That address is likely determining your happiness right now.  Unless you can find real happiness in your portfolio’s purpose.


Editor’s Note:  (RSP) Invesco S&P 500 Equal Weight ETF and (SPYD) SPDR Portfolio S&P 500 High Dividend ETF are exchange trades funds with management fees and expenses.  The S&P 500 Index does not have fees.  The S&P 500 is an unmanaged capitalization-weighted index of 500 large companies having common stock listed on the NYSE, NASDAQ, or the Cboe BZX Exchange. The S&P is designed to measure performance of the broad domestic economy representing all major industries.



The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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