Stock index performances can be misleading because of the power law – a small proportion of the stocks determine majority of the index performance.
Our brains are not good at deciphering non-linear math and would easily assume that a stock was up 5% on average when an index was up by 5%. This is very far from reality.
The first power law effect we see is that, the largest 500 out of 4,000 stocks represent 80% of the U.S. stock market capitalisation.
The second observable power law is that, just 5 stocks in S&P 500 took up 21% of the index weight (~4% each), while 495 stocks share the remaining 79% (~0.16% each).
The S&P 500 index is down 8.7% year-to-date (as of 21 May 2020) but it isn’t indicative of how the 500 component stocks have performed. Even at the sector level, you can see a large disparity between IT (gained 4.7%) and energy (lost 36.3%).
Hence, the devils are in the details.
I dived deeper into the S&P 500 sectors and identified the top 5 and bottom 5 performers. There were more diverse stock performances among them. This list should give you a better sense how the overall stock market has been doing year-to-date than merely a S&P 500 index.
Information Technology +4.7% YTD
There were 24 gainers and 47 losers in this sector.
Top five gainers were Nvidia (Graphics Processing Units), PayPal (online payment processor), ServiceNow (cloud computing), Fortinet (cybersecurity) and Jack Henry & Assoc (payment processing services).
Top losers were Alliance Data (loyalty and marketing services), DXC (IT services), Xerox (workplace and digital printing services), HP Enterprise (edge-to-cloud platform-as-a-service) and Western Digital (data storage).
Consumer Discretionary -0.3% YTD
There were 9 gainers and 54 losers in this sector.
The top 5 gainers were Amazon (e-commerce), Chipotle Mexican Grill (Mexican fast food), Ebay (e-commerce), Tractor Supply (home improvement chain store) and Dollar General (discount retail stores).
The top 5 losers were Norwegian Cruise (cruise line), Carnval (cruise line), Royal Carribbean (cruise line), Kohl’s (department store retail chain) and Nordstorm (department store retail chain).
Communication Services -1.4% YTD
There were 10 gainers and 16 losers in this sector.
The top 5 gainers were Netflix (video streaming), Activision Blizzard (video games), T-Mobile US (mobile telecommunications), Take-Two Interactive (video games) and Facebook (social networks).
The top 5 losers were ViacomCBS (media conglomerate), Discovery Communications (mass media), Live Nation Entertainment (concerts and live events), Omnicom (marketing and advertising agencies) and Interpublic (marketing and advertising agencies).
Health Care -2.7% YTD
There were 27 gainers and 32 losers in this sector.
The top 5 gainers were Regeneron (biotech), Vertex Pharmaceuticals (biopharmaceutical), Eli Lilly (pharmaceutical), Abiomed (medical implant devices), and Gilead (biotech).
The top 5 losers were HCA Healthcare (healthcare services), UHS Inc (healthcare services), Dentsply (dental equipment and supplies), Boston Scientific (medical devices) and Waters Corp (analytical laboratory instrument).
Consumer Staples -9.4% YTD
There were 11 gainers and 22 losers in this sector.
The top 5 gainers were Clorox (cleaning products), General Mills (food brands), Kroger (supermarkets), Monster Beverage (beverages), and Walmart (supermarkets).
The top 5 losers were Coty (beauty products), Sysco (food distributor), Lamb Weston (food processing), Tyson (food processing) and Walgreens (pharmacy store chain).
Materials -13.6% YTD
There were 3 gainers and 25 losers in this sector.
The 3 gainers were Newmont (gold mining), Ecolab (water, hygiene and energy technologies), and Air Products (gases and chemicals).
The top 5 losers were Mosaic Co (phosphates and potash mining), CF Industries (fertilizers), WestRock (corrugated packaging), LyondellBasell (chemicals) and Martin Marietta (building materials).
Utilities -14% YTD
All 28 stocks in this sectors suffered losses year-to-date.
The top 5 losers were CenterPoint Energy (electric and natural gas utility), AES Corp (electric power), PPL Corp (electric power), Edison International (electric utility) and Consolidated Edison (electric, gas and steam utility).
Industrials -21.7% YTD
There were 9 gainers and 63 losers in this sector.
The top 5 gainers were Carrier (Heating, Ventilating and Air Conditioning (HVAC) Systems), Old Dominion Freight Line (less-than-truckload shipping), Rollins (pest control), Otis (elevators and escalators), and Verisk Analytics (data analytics and risk assessment).
The top 5 losers were United Continental (airline), American Airlines (airline), Delta Air Lines (airline), Howmet Aerospace (components and structures for aerospace) and Boeing (aircraft design and manufacturing).
Financials -28.7% YTD
There were 8 gainers and 58 losers in this sector.
The top 5 gainers were MSCI (indexes), MarketAxess (fintech), S&P Global (credit rating and indexes), Moody’s (credit rating) and NASDAQ (stock exchange).
The top 5 losers were Invesco (investment management), Wells Fargo (bank), Coamerica (bank), Discover (loans and credit cards) and Synchrony Financial (loans).
Energy -36.3% YTD
There was only 1 gainer but 26 losers in this sector.
The gainer was Cabot Energy (oil & gas exploration).
The top 5 losers were TechnipFMC, Occidental Petroleum, Noble Energy, Helmerich & Payne and Marathon Oil. They are all in the oil & gas exploration business.
Index Does Not Tell You The Average Return of Stocks
The performances of the index component stocks varied widely and a stock index does not do a good job in indicating the average return of its components.
This is due to the skewed weightage towards a handful of stocks. Hence, we have to break it down to their sectors and identify the top and bottom performers to get a better sense of how the stocks are doing.
Here are some concluding observations.
Biotech were up by more than 10% due to the hope of impending vaccines for Covid-19. Tech, e-commerce, video games and online payment processors have gained more than 10% too.
Supermarkets have gained more than 5% as consumers stocked up groceries at home.
Cruise lines, airlines and departmental stores were down by 60%. Banks and oil and gas exploration were down by 50%.
All these performances were masked by S&P 500’s 8.7% loss year-to-date.