The Dow Jones doesn’t tell you the real story of the sharemarket

Lots of people are making lots of fuss about the Dow Jones industrial average flirting with a nice new benchmark: 30,000. Watching the Dow is a terrific spectator sport, and you can be sure that more than a few bottles of champagne will be uncorked when we get a 30,000 Dow.

But let’s remember the market indicator that really matters: the S&P 500 index. And let’s take a closer look at the handful of stocks that are powering its rise.

Focusing on the Dow doesn't give you the full picture of Wall Street.
Focusing on the Dow doesn’t give you the full picture of Wall Street. Credit:AP

The S&P is lots more important than the Dow because there’s $US5 trillion ($6.9 trillion) or so of investor money indexed to it. That’s more than 150 times as much as is tied to the Dow.

What’s really striking about the S&P, which has risen sharply this month, is how much of its return so far this year comes from a mere half-dozen tech stocks that represent barely 1 per cent of the 505-stock index.


As of Monday’s close in the US, the Big Six, as I call them – Apple, Amazon, Microsoft, Facebook and the two share classes of Google owner Alphabet – accounted for almost three quarters of the S&P’s return for the year.

Let me show you the numbers which, like all the statistics in this column, are based on information from S&P Dow Jones Indices.

Through the end of trade on Monday (US time), the Big Six accounted for 73.8 per cent of the S&P’s 2020 total return. That total return, 14.1 per cent, includes the index’s 12.3 per cent price gain plus reinvested dividends.

I’m using total return numbers rather than just the S&P’s price gain because that shows how much of the money that S&P index investors have made is attributable to the Big Six.

A brief aside: Yes, there are 505 stocks in the S&P 500. That’s because five of its component companies have two share classes listed in the index.

Now here are the numbers. Apple, the biggest stock in the S&P, generated a 3.4 per cent return for the index as of the start of this week, followed by Amazon (2.8 per cent), Microsoft (2.4 per cent), the two share classes of Google’s owner Alphabet (1.1 per cent), and Facebook (0.8 per cent).

The Big Six – which, not coincidentally, are the six most valuable stocks in the S&P, which ranks components by their stock market value – were only 22 per cent of the index’s value as of Monday. (Details: Apple, 6.4 per cent; Microsoft, 5.5; Amazon, 4.4; the two Alphabets, 3.5; and Facebook, 2.2.)

This means that when it comes to making money for investors, the Big Six have been punching way above their weight, because their contribution to the S&P’s return is more than triple their weight in the index.

One thing that leaps out at you is that they’re all businesses closely tied to the internet, which has thrived as the coronavirus pandemic has crippled the economy.

“If the problem were a computer virus instead of the coronavirus, all these stocks would have been in the toilet,” quips Howard Silverblatt, senior index analyst at S&P.

The stock prices of tech giants are powering Wall Street.
The stock prices of tech giants are powering Wall Street. Credit:AP

Another thing that leaps out at you is that some or all of the Big Six are companies that you might not want to own as individual stocks.

In my case, I wouldn’t own any of them. I wouldn’t own Apple (other than some shares I’m holding as future birthday gifts for my grandchildren) or Microsoft because I occasionally write about them; I wouldn’t own Amazon because it’s priced so high and because its chief executive, Jeff Bezos, owns The Washington Post; and I wouldn’t own Facebook or Alphabet because I don’t have confidence in my ability to parse their financial statements.

But I’m making money from all these companies indirectly because my biggest single stock investment is S&P index funds. My second largest investment is total stockmarket index funds, where I’ve also been making money from the Big Six this year, but where their influence is smaller than the S&P funds.

If you’re into S&P index funds, total market index funds or both, you’re in the same position I am. These five companies and their six stocks have made money for you without you having to figure out whether you want to own any of them as individual investments.

So have fun watching the Dow and cheering it on. But just remember where the big money is.

The Washington Post

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