What is the difference between the S&P 500, 495, and 5?
Our point is this, first watching an Index driven by 5 stocks is not a high-quality benchmark even if the media touts the Index. If you own these 5 stocks as your only investment your portfolio would not be considered diverse, nor would you be managing risk very well. Currently, the S&P 500 is (unofficially) the S&P 5. Don’t believe us? The top 5 largest stocks have return +39%, Facebook, Apple, Amazon, Alphabet/Google, Microsoft versus the other 495 are -1% YTD. In the year 2000, we saw a similar dilemma. It is hard to tell what the amount that the top 5 of the S&P drove the market back then. So, let’s pick on Microsoft, who was #1 in ‘99 in the S&P with a market value of $604 B, by the end of 2000 the company’s stock had lost @61.75% to $231 B. In ’99, we could have called it the “S&P 10 vs the S&P 490,” with 10 companies holding @30% of the Index’s value. Now as then, we believe this Index is demonstrating a bubble, specifically another tech bubble similar to 2000. All of the current top 5 companies are in the same industry, the Tech industry. These five stocks make up @24% of the Index.In our opinion, this is a very dangerous phenomenon that occasionally occurs in history, up to this point as always ended badly for those investing these, and we want our clients to avoid.
Why are we not in the S&P 5?
A quick answer for our Faith-Based investing clients is that none of those companies pass the screen for our Biblically responsible index. For those not in that index, it is for a couple of reasons. They have had an extreme amount of volatility since March and our indicators told us to go “risk-off” in February. Another is the excess price for the value of those companies that we have talked about multiple times over the past few months. In our opinion, the same institutions that have helped increase the price will also be the ones to quickly sell-off as it starts to tumble creating a fast descent. You throw all of this together and essentially buying into the “S&P 5” now would be buying high and selling low.