Markets are up year-to-date. Or are they?
You’ve probably heard that the stock market has been doing surprisingly well this year. As measured by the S&P 500 Index, that’s true. As of September 30, the S&P 500 was up 5.6% year to date.
But even though the S&P 500 is often thought of as being “the market,” it actually only tracks about 500 U.S. large-company stocks. That leaves about 19,295 other U.S. publicly traded stocks to invest in. Taking a closer look, we see a wider assortment of hit-and-miss performances from January–September, 2020.
For example, small-company stocks were down –8.6%, and foreign stocks were down about –5.5%. Even within the S&P 500, some sectors did dramatically better than others. U.S. energy stocks, airlines, hotels, resorts, cruise lines, banks, and most commercial real estate were down from –28% to –48% (except warehouses, up 14%). But restaurants were up a surprising 8%. Other strong performers were groceries, technology, and home improvement. Online retail was the biggest winner: up 60%.
Another way to slice the market is growth vs. value stocks. As the name implies, growth stocks represent companies with fast-growing sales and earnings. They’re in higher demand, and thus “expensive” to invest in. For example, to expect $1 of earnings from a Tesla stock, you must currently pay over $1,000/share! Value stocks represent slower-growing companies, with prices typically discounted accordingly. It will cost you closer to $17–$21/share to expect $1 of earnings from a value stock.
For some time, growth stocks have been outperforming, and value stocks have been underperforming expectations. Year-to-date through September 30, large-cap and small-cap value stocks remained down –12% and –22%, respectively. Large-cap and small-cap growth stocks were up 24% and 4%, respectively. The growing disparity between them has also further widened their price gap. Relative to historic pricing, growth stocks are especially expensive, and value stocks are especially cheap.
So, is the stock market up this year? Clearly, it depends on how you define “the market.” The moral of the story: Investors should remain as diversified as possible to capture the market’s overall expected returns. A concentrated position could go either way at any time, making it more like a wager than an investment.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.