Headline stock indexes (S&P 500, Dow, Nasdaq) continue to trade near all-time highs, and sport gaudy 5-year returns. These indexes have averaged more than 15% a year each since this time in 2010. The problem is, some investors think this is a reflection of the entire investment universe. Far from it.
Most U.S. stocks either trade on the New York Stock Exchange (NYSE) or the Nasdaq. We continue to see a pattern, especially over the past year, when the indexes grab the headlines but much of the flair is only skin-deep. This is most apparent when looking at the returns of the collective stocks in each of those two main U.S. stock exchanges. For the 12 months ended 6/15/15, the Nasdaq Composite Index returned 17.04%. The NYSE’s return over that time: 1.16%. It's like the proverbial hot-shot calling out the old timer for being past his prime and out of touch with the new world reality. Just like in the dot-com bubble.
This reminds us of that popular recent TV ad series featuring a character named “Uncle Drew” (who was really NBA star Kyrie Irving visiting a playground dressed as an old guy. You can link to one of the Uncle Drew commercials here:
Investors should resist the temptation to dismiss the venerable NYSE’s higher quality businesses and simply fall in love with what is working recently. One analysis we did recently showed that all of 2015’s gains in the S&P 500 could be attributed to 10 tech and biotech stocks. The returns of the other 490 companies offset each other. That is a narrow market!
Note that for the first 30 years of the Nasdaq’s history (1970-2000), it was really known as a stock exchange, and less as an index to reference one’s performance against. It was the dot-com bubble that turned Nasdaq into a source of media hype and investor greed, which culminated with a more than 75% drop in under two years, from the spring of 2000 to the autumn of 2002. We are very concerned that the investing public is once again separating true investment value from investment emotion. It is a great time to take account of the not-so-obvious risks in your portfolio.
(c) Sungarden Investment Research