9/26/2013 7:30 PM ET|
Why the S&P 500 is beating the Dow
The easy, often-offered explanation for the Dow outperforming the S&P 500 is investor caution. There is truth there, but it's not the whole story.
Keeping an eye on the relative performance of these two much-publicized indexes has been a pastime of mine for many years. It tells me things about the market's mood and how investors are parsing economic and political developments.
Of course, there are jillion other indexes nowadays that deliver seemingly similar information. They tracking mega, super-large, merely large, upper midcap, lower midcap, small, micro-cap and even nano-cap stocks, not to mention growth, value and "core" stocks.
But because these two highly correlated indexes lie at the liquid heart of the market, the subtle dynamics of their relationship convey what I believe are important nuances.
For example, this year the S&P 500 jumped ahead on the spillover of exuberance about 2012's strong finish. But by the third week of January, as Congress reconvened and the Obama administration began its second term, the Dow caught up and surpassed it. That lead held until summer, as this chart shows:
The easy, often-offered explanation for the Dow outperforming the S&P 500 is investor caution. When the road ahead is filled with potholes and problems, according to this reasoning, investors seek refuge in larger stocks. There is truth in it, for the Dow seldom slips as much as the S&P 500 in market downturns.
But both the early-year leadership shift and the summer switchback occurred in the context of a rapidly rising market that gained more than 10% in the first quarter and almost as much in the subsequent six months. Investors have been pouring money into stocks, so caution isn't the right descriptive.
Moreover, indexes of midcap and small stocks have outraced those of large caps all year. That's relevant because the S&P 500, though dominated by a 96.4% weight in large stocks, nonetheless has that 3.6% remainder in smaller stocks. The Dow has no smaller stocks, which means the S&P 500 sometimes zips ahead on a tailwind when smaller stocks have caught investors' fancy.
Two factors contributed to the Dow's early supremacy. One was the nearly 27% drop in shares of Apple (AAPL) from the beginning of the year through mid-April. Apple is the largest stock in the S&P 500, and it isn't in the Dow. The other was heavy investor emphasis on dividend-paying stocks in the first half of the year -- which included all the Dow stocks but far from all the S&P 500 stocks.
The same two factors reversed themselves as the year wore on, contributing to the S&P 500 regaining the lead. Apple rebounded almost 20% from late June through the third week of September. And equity-income strategies began to fade as interest rates ticked higher in anticipation of the Federal Reserve tapering its Treasury bond-buying program.
Larger shifts were in the works, too. In the first half, investors were concerned about global economic growth, particularly focusing on a deceleration in China and recession in Europe. By August, China's problems didn't look quite so discouraging, and Europe -- at least parts of it -- was starting to show signs of life.
Meanwhile, the U.S. economic recovery continued. It remained slower than anybody wanted, but it trudged ahead steadily and even delivered a few modest surprises now and then.
In short, growth stocks look relatively less risky as summer ends, giving a boost to the S&P 500. Value stocks, which dominate the Dow, still appeal to many investors but have lost almost all their momentum advantage over growth stocks. The SPDR S&P 500 Growth ETF (SPYG) had close to a 5% performance deficit to the SPDR S&P 500 Value ETF (SPYV) at the end of July. As of Sept. 20 that had shrunk to 1%.
Who knows if this trend will persist or if another reversal lies ahead? Watching the interplay between the Dow and the S&P 500 is a fascinating way to gauge the market's deep currents.
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Hmmm,.........As the article states in the headline S&P beating the DOW....??
But "NO WHERE" in the article are the S&P/DOW comparisons...great article ??
I read it 3-4 times....NO PERCENTAGES !!!
Although I have done my own research from 2007 highs and 2008 lows.
And the S&P is ahead of the latter readings by about 0.5%...
At least I think that is right.
Ronald Reagan was said to consult Jean Dixon- Astrologer before his important decisions. Sometimes he put off events based on what her charts suggested.
Several prominent Astrologers are suggesting a fiery end to banks and a cataclysmic national event in the coming weeks. WEEKS. The curious question isn't in the validity, it's the possibility.
YOU have nothing going for you. A majority of us are unemployed or under-employed and destitute. You haven't done crap about career and job blockades. A fair number of enterprises appear to be entirely virtual or-- make believe and not tangibly productive. Who believes we can thrive printing fake money and running online businesses that don't do enterprise? Who believes a business platform is a business at all?
I know enough about finance to see no businesses actually making it on actual product sales to real people. Today's Dow climbed on the exact same news that generated a loss last month. The truth is- we aren't really a nation anymore... we're a gallery for politics and hubris stupidity.
Cosmo Magazine highlights women with successful careers and poor relations. It's an interesting fact that women achieved success as their men lost careers in the mass termination. The women didn't support their men, they used the event to compete unfairly until the relation was ruined. The men left broken. Is that a success or failure on all levels? We don't need successful women who break men or can't handle relationships without corrupt domination. 70% of marriages are broken now. Those other 30% are too poor to legally sever.
I don't have to 'read the stars' to tell our future. Sober people can see failure straight ahead and we on a collision course for it. Are you sober enough to see it?
A Congress that ignores us for a lobby position isn't a Congress at all... it's a terror sect in need of a surprise attack. Stagnation on purpose beats chemical warfare all day long. One tortures until death finally comes, the other is an invisible gas.
Tomorrow-- backbone or bust. The roads you've coursed haven't done us any good. Change that destroys is insanity... not inevitability. What is inevitable is death when YOU pull out all the stops to ensure it happens. Wake up.
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