Yesterday I showed that chart of all the major asset performance in 2018 year to date. If you missed it the blog is here. I had a few follow up questions about why the Nasdaq is so far ahead of the S&P 500. Here they are side by side:
1.53% YTD vs 9.19% YTD is quite a big difference. Now for those of you who aren’t aware, the S&P 500 is a broad composite index of 11 wide ranging sectors. Examples are financials, energy, healthcare, consumer staples etc. Technology accounts for 22% of the S&P 500.
The Nasdaq however is much more technology heavy with a weighting of 57%. So anytime tech names are performing well we will likely see the Nasdaq beating the S&P 500. That’s been the case this year.
But not all tech names are doing well. In fact a large portion of the performance in 2018 year to date can be attributed to just 3 names.
Apple, Microsoft, and Amazon have been doing very well this year and have lifted both the S&P 500 and the Nasdaq. In fact, these three companies have accounted for 70% of all of the S&P 500 rise this year. The other 497 companies (502 common stocks) are responsible for the remaining 30% performance.
Naturally since those three companies are a 30% weighting of the Nasdaq index they are also largely responsible for the good performance year to date as well and why it’s up over 9% when the S&P 500 is below 2%. But it’s really just one company isn’t it?
How much of a monster? Check out the performance of Amazon vs the entire S&P 500 retail sector in the last 5 years:
As long as Amazon keeps stomping on all other retail companies like Godzilla through downtown, the S&P 500 and especially the Nasdaq will likely keep rising as well simply because it’s such a large weighting.
But as the old saying goes, what goes up must come down. We saw a little bit of that with the dot.com bust that saw the Nasdaq fall 78% from it’s peak. Now what goes up must come down doesn’t technically apply to stocks, it could just keep getting larger or at the very least tread water for our entire lives. And who knows maybe the future will see large companies ruling rather than governments?
At the very least large tech names like Amazon, Apple, Microsoft, Facebook, Alphabet are worth keeping a close eye on. Their sheer size can prop up the markets, or tank the markets.
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