Those following the stock market may realize that the S&P 500 hit a new all-time high on 9/2, building on the August 18th high which wiped out all its losses from the coronavirus sell-off, and surpassing the previous high of February 19th. However, a CNBC analysis shows that many stocks have yet to climb back to their prior levels. For example, between the prior market high on February 19th and August 18th, when the market first surpassed the previous high, 38% of stocks in the index made gains while the remaining 62% were still negative.
Performance varied by sector, with more than 50% of stocks in the consumer staples, health care, and information technology sectors showing gains. That figure is less than 10% for energy and utilities stocks.
There have been a number of big winners during the pandemic, with significant gains from the 2/19 previous market high – such as Zoom which is up over 300%, Amazon and Apple which are up over 60% and Facebook which is up nearly 40% since 2/19. However, there have been far more big losers. In many cases, some of the stocks that are still negative are actually down significantly from where they were in February.
The CNBC analysis of performance of stocks from 2/19 through 8/18 showed that a quarter of the index (126 stocks in total) saw declines of 25% or more compared to the Feb. 19 starting point. With the challenges in travel and collapse of the energy markets, the three worst performers are not too surprising – Norwegian Cruise Lines (-71%), Occidental Petroleum (-67%), and Carnival Corporation (-67%).
Much of this divergence in performance is to be expected as consumer demand has shifted dramatically in a mostly virtual world. Investors consequently see opportunities in those sectors and individual companies which are either thriving in this virtual world, or at a minimum have been able to pivot to adapt. Conversely, investors are avoiding sectors and companies that are experiencing significant headwinds in terms of demand, shrinking cash flow and/or high debt burdens.
As you can see from the chart below, stocks of companies in the consumer staples, health care, and information technology sectors have fared the best, with more than 50% of stocks posting gains between Feb. 19 and Aug. 18. Energy and utility stocks (traditional “value” stocks) have fared the worst, with less than 10% posting gains in the same time period.
As you can see from the chart below, even within individual sectors performance has varied greatly. Tech stocks, for example, experienced a wide range of returns. For example, PayPal and Nvidia each rose by more than 50%, while on the other end of the spectrum of the tech sector, Western Digital and Xerox both fell just as steeply.
In the health care sector, performance ranged just as widely. Abiomed led all stocks in the index with an 87% gain from Feb. 19 to Aug. 18, but more than 40% of stocks in the sector were negative in that time period.
So what does this mean for you as an investor? We think there are a couple of important take-aways.
• The stock market indices you see mentioned in the nightly news are market-cap weighted, which means the largest stocks (by market capitalization) are increasingly driving the performance numbers for these indices. Drawing conclusions about the broader market based on the movement of a cap-weighted index can be misleading.
• The “market run-up” you see when viewing the performance of the index can mask the true condition of the market when we are experiencing a recovery that is more narrow (like now) vs. a broader-based recovery. As of 9/3, the top 5 stocks (Apple, Microsoft, Amazon, Facebook, Alphabet – Google) make up over 22% of the index. Increasingly the S&P performance is driven by the ups – and downs – of stock prices for these 5 tech companies.
• This challenging economic environment means not all companies and sectors are experiencing the challenges of the pandemic in the same way. Some are facing headwinds, some are operating “business as usual” and some are experiencing significant tail-winds. This is the kind of market where active management styles can excel. As a renowned money manager said it best, “these are times to be hunting with a rifle, not a shot gun.”
In the last few days, we have seen significant sell-offs in the technology sector (as well as with Tesla shares). As mentioned above, the performance of a few large companies can not only drive market indices higher, but also lower. This may create anxiety among less-informed investors about the overall “market” and may also encourage some investors who have been over-weighted to the impacted sectors to take some of their profits off the table. Maintaining a well-diversified portfolio during times like these can be an effective approach to dampening volatility during inevitable market swings.
With the course of COVID uncertain and a contentious election ahead of us, rest assured your AFA team is carefully monitoring the economy, the broad market (not just the indices) and the individual holdings comprising your portfolio. We are comfortable with our positioning and the risk and return of our portfolios in these unprecedented times. However, our work for each of you is customized, and if you experience changes or challenges that might warrant revisiting our strategy, please reach out to your advisor. We also hope you and any guest you might invite will join us for our upcoming webinar on the possible impact of the pandemic and the election on the markets and economy (you can register here). And of course, if you have any other questions or concerns we can assist with, please don’t hesitate to let us know.