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What's with the market (pt.2)?

Updated: Nov 9

Year-to-Date Performance Analysis
YTD Total Return for Select Indexes

The image displays a Bloomberg terminal screen showcasing the performance metrics of various indices, with a focus on their year-to-date total return.

1. **SPX Index (S&P 500 Index)**: The total return for the SPX Index is 15.57%. This return encompasses the cumulative price appreciation plus dividends reinvested for the S&P 500, representing a broad spectrum of large-cap U.S. equities. This index is a benchmark for many investors as it provides a snapshot of the health and performance of the corporate America.

2. **SPW Index (S&P 500 Equal Weighted Index)**: The SPW Index has a total return of 0.99%. Unlike its market-cap-weighted counterpart, this index assigns an equal weight to all S&P 500 stocks, which illustrates the performance of the "average" stock in the S&P 500. Note: Over half of the stocks in the S&P 500 are down for the year.

3. **MID Index (S&P MidCap 400 Index)**: The MID Index experienced a total return of 2.07%. This index measures the performance of mid-sized U.S. companies and is often used as a barometer for the domestic mid-cap segment, which can sometimes offer a balance between the growth potential of small caps and the stability of large caps.

4. **SML Index (S&P SmallCap 600 Index)**: The SML Index's total return is -1.10%. It focuses on small-cap companies in the U.S. stock market, and the negative total return reflects a downturn in this market segment or insufficient dividends to offset any price depreciation over the specified period.

5. **BM7T Index (Bloomberg Magnificent 7 Total Return Index)**: This index boasts a total return of 92.20%. The "Magnificent 7" is comprised of Microsoft, Meta, Amazon, Apple, Alphabet, NVIDIA, and Tesla. This impressive total return indicates a significant increase in value, suggesting that this index tracks a very dynamic segment of the market with substantial growth over the measured time frame. More on this in a moment though...

6. **LBUSTRUU Index (Bloomberg US Aggregate Total Return Value Unhedged USD)**: The total return for the LBUSTRUU Index is -0.49%. This index provides a comprehensive measure of the performance of the U.S. investment-grade bond market, and the negative return implies a decrease in bond values or rising yields, which inversely affect bond prices, during the period under review.

These indices offer a glimpse into different segments of the financial markets, from equities across market capitalizations to the aggregate bond market. The total returns reflect the impact of market movements, economic factors, and investor sentiment on these segments over the past 312 days. Investors use this data to gauge market trends, compare performance across sectors, and make informed decisions about asset allocation.

2022 Performance Review

The S&P 500, a barometer for U.S. equities, faced a challenging year with a downturn of over 18% in its total return, reflecting widespread market retreats possibly due to economic headwinds, inflationary pressures, and shifting monetary policies.

Notably, the BM7T Index experienced a huge decline in 2022, with a drop of -45.32%. This performance indicates that the index underwent a substantial reduction in value, reflecting a challenging investment environment for the components of this particular index.

2022 Performance Review for Select Indexes

The Bloomberg US Aggregate Index, a benchmark for U.S. bonds, also saw a double-digit decline, which is notable in the context of the fixed income market. This could suggest that rising interest rates and inflation concerns heavily impacted bond prices.

The year 2022 appears to have been a difficult one for investors across various asset classes, with equity markets experiencing notable downturns and even the bond market not being spared. The economic environment likely played a significant role, as inflation, interest rate hikes, and other macroeconomic factors contributed to the downward pressure on asset values.

A Turbulent 2 Years

Over the last two years, the S&P 500 has faced significant headwinds, with its performance languishing as it struggled to gain positive momentum. Throughout this time, the index has experienced the onset of bear market conditions on three separate occasions, reflecting a period of heightened economic uncertainty and market volatility. This protracted downturn has likely tested the resolve of investors, as sustained negative performance can often prompt a reevaluation of investment strategies.

Trailing 2 Year Performance for Select Indexes

In contrast, the Bloomberg Magnificent 7 Total Return Index (BM7T) has shown a remarkable turnaround; after a massive drop of nearly 46%, it has managed to recover to a positive return over the same period. This turnaround, however, follows a period of significant losses, which may have led to considerable investor trepidation and sell-offs, before the eventual rebound took shape.

S&P 500 Market Dynamics

The S&P 500 index, with a trailing 12-month price-to-earnings (P/E) ratio of 21.63, is reflective of investor anticipation for continued earnings growth, albeit at a valuation that may be considered above historical averages. The index shows a pronounced concentration in its composition, where the three largest constituents—Microsoft Corp, Apple Inc, and Inc—collectively make up 18.11% of the index's weight. This concentration is even more pronounced when considering the top 10 holdings, accounting for approximately 30.14% of the index's total weight.

S&P 500 Market Dynamics as of 11.07.23

Sector-wise, Information Technology is the predominant sector with a significant weight of 28.71%, underscoring the tech-heavy skew of the index. The Communication Services sector also holds a substantial weight of 8.74%, together with Information Technology, these two sectors comprise over a third of the index, indicating a significant dependency of the index's performance on the health and profitability of the tech and communications industries. This concentration highlights the potential for higher volatility, should these sectors experience any significant downturns or regulatory changes.

The Average Stock vs. the "Magnificent 7"

The performance of the S&P 500 ETF (SPY) as of November 2023 shows a notable year-to-date total return of 15.55%. A substantial portion of this return can be attributed to the strong performance of the top technology and communication services companies within the index. Specifically, the combined contribution to return (CTR) of Microsoft, Apple, NVIDIA, Amazon, Meta Platforms, Tesla, and the two Alphabet share classes sums up to 13.12%. This indicates that these major players, often referred to as the "Magnificent 7," are significantly influencing the overall index, accounting for approximately 84.4% of the SPY's total return for the observed period. This underscores the outsized impact that the largest tech and communication stocks have on the broader market's performance, particularly in an ETF structured to mirror the S&P 500, where such companies have a heavy weighting.

S&P 500 Year-to-Date Contribution to Total Return

The "Magnificent 7" tech giants exhibit a range of 12-month trailing price-to-earnings (P/E) multiples that signal varying degrees of investor expectation and potential risk. NVIDIA Corp stands out with a P/E ratio of 106.97, and Tesla Inc follows closely at 71.26. These figures are well above the average P/E ratio of the S&P 500 index, reflecting investor anticipation of high future growth. However, the flip side of such optimism is the vulnerability to stock price corrections if growth targets are not met or if there are any disappointments in earnings or future outlook.

12-Month Trailing Price-to-Earnings Multiple for the Magnificent 7 Inc carries a P/E of 67.09, also suggesting high expectations for future profitability. The P/E ratios for Alphabet Inc-CL A at 24.29 and Meta Platforms Inc-CL A at 20.84 are lower in comparison to the aforementioned companies but still represent optimistic projections above the market average.

Microsoft Corp and Apple Inc have P/E ratios of 34.61 and 29.71 respectively. While these are elevated, they are more aligned with their historical earnings growth, suggesting a slightly more balanced risk-reward scenario. Given these high valuations, any missteps could lead to significant stock price volatility. Investors pricing these stocks for perfection might face heightened downside risk if earnings releases fall short of the high expectations embedded within these multiples.

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Unless otherwise indicated all performance is sourced from Bloomberg.


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