You may wonder how the market is going up while there are still so many unemployed and the economy seems to be in such bad shape. There are many reasons, including government stimulus, lower gas prices and lower interest rates. Moreover, the economy is starting to open again and theoretically the worst is behind us. Lastly, every day we seem to hear about advances in treatments, vaccine development and testing.
While all of these are important developments, I also think a further look needs to be conducted into what we mean by “the market.” The Dow Jones Industrial Average (DOW) and the S&P 500 Index are commonly referenced when discussing market performance. However, since the DOW only consists of only 30 companies and, people more often look to the S&P 500, which is a broader index and is market cap weighted, as a more comprehensive measure of “the market.”
So, what makes up the S&P 500? This chart shows a breakdown of the S&P 500 by sector as of 3/31/2020.1
| Sector | Percentage |
|---|---|
| Communication Services | 10.70% |
| Consumer Discretionary | 9.80% |
| Consumer Staples | 7.80% |
| Energy | 2.70% |
| Financials | 10.90% |
| Health Care | 15.40% |
| Industrials | 8.20% |
| Information Technology | 25.50% |
| Materials | 2.40% |
| Real Estate | 3.00% |
| Utilities | 3.60% |
Technology and Health Care are sectors that have been less affected by the Coronavirus and potentially have better chances of future growth. The two sectors represent almost 41% of the entire index. Also, if you look at examples of the companies that fall under the Communication Services, Consumer Discretionary and Financials sectors, you’ll actually see even more that could be categorized as technology, and these sectors represent 31.4% of the overall index.
The sectors most hurt by the virus have been Real Estate, Materials, Energy, and Industrials which represent 16.3% of the overall index. Roughly speaking, that means the stronger sectors (Technology and Health Care) represent at least 250% more of the total index than those suffering. Depending on how much of the 31.4% mentioned above could also be considered technology, it could be even more than 250% over the weaker sectors.
In summation, because the stronger sectors outweigh the weaker ones by such a large percentage, it makes sense that the markets have moved higher, even despite there still being some negative aspects taken into account.
1https://investor.vanguard.com/etf/profile/VOO
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value.
The Dow Jones Industrial Average (DJIA or DOW) index is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks.
The indexes discussed are unmanaged and cannot be directly invested into.
Past performance is no guarantee of future results. Investing involves risk and the potential to lose principal.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. The information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Waddell & Reed, Inc. as to the accuracy and is not intended to be used as the basis for any investment decisions. The information presented does not constitute a solicitation for the purchase or sale of any security and is not a recommendation of any kind. Please consult your financial advisor before making financial decisions.
Jordan Kerner
Financial Advisor, Waddell & Reed, Inc.
Office: 475-619-2240 | Cell: 917-301-7274 | Fax: 203-557-6262
www.jordankerner.wrfa.com | jkerner@wradvisors.com
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