Major Market Index Moves to the Tune of Tech Stocks

THE BRIEF

COVID-19 has brought many debates about whether the markets have recovered.

• The S&P 500 (SPX) is heavily weighted towards technology companies and large-cap stocks that have made it less representative of the overall market.
• Investors need to rely on several market indices to measure the performance of the overall market.

THE EXPLANATION

The S&P 500 (SPX) is an index that tracks the overall performance of the largest 500 stocks in the US. The SPX has historically been known to be one of the best representations of the overall US stock market. Over time, two biases have made the SPX a less trusted performance indicator of the overall market.

1. The shift in the index weight towards technology stocks. Tech stocks made up 26% of the index while the energy sector made up only 3%. The S&P 500 index gives a completely different picture from the outlook in the energy sector and smaller weighted sectors.  
2. The pandemics impact on small businesses is not accurately represented in the SPX. The S&P 500 is down 13% from their pre-COVID highs while the Russell 2000, an index that tracks the performance of the smallest public companies in the US, is down 23%.

THE ACTION

If you can’t trust the SPX, then what can you look at to see if the economy has recovered?

It is important to evaluate several indices in order to get a clear picture of the overall market. The SPX can further be broken down into 11 sub-indices that track the performance of the following individual sectors:

• S&P 500 Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate Sector, Information Technology & Utilities.