SPY: Feels like the Dot.com Bubble, All Over Again
This is a bull market? Not for most of the S&P 500 stocks.
At $544 billion in assets and counting, the SPDR S&P 500 ETF (SPY) is now as iconic to investors as Benjamin Graham, Fidelity Magellan mutual fund and Standard Oil have been during investment eras of the past.
The fact that it is closely followed in assets by the $502 iShares Core S&P 500 ETF (IVV) and the $484 billion Vanguard S&P 500 ETF (VOO) is a testament to both the success of the S&P 500 itself, and the strong belief from investors that this is “the stock market.”
These ETFs all offer a low-cost, diversified way to access the giants of the U.S. market. But the more I look at the king of modern indexes, the S&P 500 in capitalization-weighted form, the more I feel like I’m living through the dot-com bubble era all over again.
Nearly half this century covered a period in which SPY and its peers produced zero return (over about 12 years starting with that 2000 dot com bubble top). So just in case there’s a bear out there, or at least a more even playing field coming for the 490-plus stocks that are not part of the Magnificent Seven, I ran some data.
My goal was to see just how skewed the returns of the S&P 500 have been to the biggest winners. As they say, past performance is no guarantee of future returns. But try convincing newer investors of that, after what we’ve seen recently!
No Bull Market For Most S&P 500 Stocks
Here’s what I found:
This year through Monday’s close, SPY Is up 18%, yet about 40% of the stocks that make up that cap-weighted index are down for the year. And only 109 stocks about one out of every five of the 500 members are up more than SPY is this year. The median stock (that is, the one that is halfway down the ranked list of returns, so not the average but close to it) was only 5.4%.
If that doesn’t sound right or sounds weird, allow me to clarify. It is right, and it's weird.
Surely this is a mirage, a passing phase, a blip on the radar screen, right? To figure that out, I went back three years, to early July of 2021. SPY is up 10% annualized since that time, but only about 160 stocks (less than one-third of the 500 components) were up that much or more. Roughly another one-third of the stocks have been down over the past three years, and the median stock return was about 4.5%.
And here’s one “bonus” data point from my study. I looked at the returns of these stocks from the start of 2022. As investors will recall, 2022 was an abysmal year, with stocks and bonds declining sharply. 2023 was the climb back, and the first half of 2024 continued that run.
SPY, IVV and VOO Tell the Tale
What this data points to is not the emotion of the situation, but the reality. The “market” is doing great by all accounts, if one defines that as SPY or IVV or VOO or a similar ETF. But 37% of those ETFs are in only 10 stocks. Most of the rest don’t matter in terms of influencing the “headline” performance of the S&P 500. And most of the rest are essentially cancelling each other out.
This all points to one very critical aspect of investing for those who manage their own money, or those advisors who carry that responsibility for their clients. What do you want in your stock portfolio? I am old enough to remember when the norm was to find 20-30 stocks you liked and own roughly equal amounts of them. Today, that is a lost science. Indexing, for all its innovative and wealth-creating features, has simultaneously set up a generation of investors for one of three vastly different futures.
Either the past is prologue, and holders of SPY, IVV and VOO will continue as the place to be. Or, the rest of the S&P 500 will join the party, sending this market into what would then be a more fitting definition of a “bull market.”
Or there’s the third path, the one that ensued back in 2000, when the market was behaving like the way it is today. What happened then? The top-heavy market could not sustain rounds of selling, which fed on themselves, with the most liquid S&P 500 names being sold off hard, as they were the easiest to get rid of from investor portfolios. The rest of the market held up for a little while, but by 2021, it was all south. And that continued for what ended up being three consecutive down years.
That’s history and the present conditions. There are no opinions or conclusions intended here, because no one can predict the future, though so many try to. This study simply points out that there has been reward and risk throughout the S&P 500, and investors and advisors’ best position is to always understand what’s going on under the hood.
