US stocks are down year to date
You probably wouldn’t have guessed it, but stocks are down 4% in 2023 so far. This is according to the S&P 500 equal weight index.
However the more commonly quoted S&P 500 index is up 10% year to date. Why the big difference? It’s because only a handful of the 500 companies that make up the index is responsible for all of its gains.
As of earlier this month, here are the 2023 returns of the top 7 largest components of the S&P 500, called the magnificent 7.
What this means is that the remaining 493 companies which make up the most prominent index in the world are significantly underperforming relative to the top 7.
A very concentrated market
Why this matters is because throughout history when the weighting becomes very skewed the market usually falls soon after.
Usually the top 10 stocks of the S&P 500 account for less than 20% of the overall index by market cap.
But during the dot-com boom in 2000 they went up to 25% of the index. A large correction happened after that.
Last year in 2022, 7 stocks made up 29% and we fell into a bear market as I’m sure everyone remembers.
And today, the top 7 stocks account for 30% of the index’s size.
If investors are concerned about a recession or poor earnings moving forward then I guess it makes sense to try and find refuge in only the largest and safest companies.
But a highly concentrated stock market has lead to some pretty big corrections in the past.
The problem is even if history repeats itself nobody knows when the next big move down will be.
This is why I’m being cautious with my portfolio right now. Selling put spreads to earn a bit of income while not entering any new long stock positions.
I originally forecasted a recession in the US this year. With only 2 months left and the unemployment rate still below 4% it appears we’ll probably see the economy decline sometime next year instead.
The reason I’m not getting out of the stock market entirely to wait for a crash is because the best days of the stock market happen in bear markets. And I don’t want to miss out on those best performing days. 🙂
Random Useless Fact:
The sex of an alligator is determined at the time of hatching.
If the temperature of egg incubation is 30°C or below it produces females, and 34°C or above, males.