The Standard & Poor's 500 (S&P 500) stock index closed Friday at a new all-time high for the second week in a row, as the two worlds of the S&P 500 and the real economy grew further apart.
FAANGM -- Facebook, Amazon, Apple, Netflix, Google, and Microsoft -- led the recovery, the rest of the economy was on another planet.
According to Craig Israelsen, Ph.D., who teaches portfolio design to financial professionals, the largest 25 stocks in the S&P 500 represented 42% of the cap-weighting of S&P 500 index, as of August 21, 2020; the smallest 25 companies in the S&P 500 represented 0.3% of the performance of the index. The terrible losses year-to-date on the smallest 25 stocks are not influential in the market-cap weighted S&P 500 index, but they reflect the world of pain in the real economy.
Of the 500 stocks in the S&P 500, 294 had a negative return through last Friday, Israelsen said. The average loss year-to-date return of the 294 companies was -24.1%.
The S&P 500 stock index closed Friday at 3,508.01, a new all-time high, surging +3.21% from last Friday. It's +44.23% higher than its March 23rd bear market low.
As the S&P 500 breaks records, it's prudent to remember that the S&P 500 is not the real economy. The disconnect between the market-cap weighted S&P 500 and the broader economy is one of many anomalies caused by the Covid shutdown and recovery.
The bottom line is that the FAANGM stocks are not trading at outlandish valuation levels, not even close to the 1999 tech-bubble. At the same time, the performance of the S&P 500 is not reflecting the broad economy's pain. The two things are both true as the economic recovery from the pandemic, haltingly, has progressed.
Stock prices have swung wildly since the crisis started in March and volatility is to be expected in the months ahead.
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