S&P 500 Opens Above 3,000

Today's trading was positive, with the Dow Jones Industrial Average gaining almost 2% from its previous close, and the S&P TSX Composite gaining 0.5%. The big news, however, was the S&P 500 opening above 3000 and closing at 3036.25.

Source: Bloomberg, May 27th

This is the first time the S&P 500 has opened and closed above 3,000 since March 5th. It's also 200 points higher than 12 months ago, so a particularly inattentive investor will be heartened by the performance of their portfolio.

S&P 500 Driven By Five Companies

We've mentioned this before, but how a given index is compiled greatly affects the performance it's reflecting. The simplest way to compile an index is to take the sum of the component securities' prices, which gives you a "price-weighted" index, a very crude understanding of performance. This is how the Dow Jones Industrial Average is assembled and why most sophisticated investors don't use the Dow as much more than a weather vane.

The S&P 500 is a capitalization-weighted index, where changes in the price of a given stock affect the index to the degree that their capitalization represents a fraction of the index. The movement of big companies affects the index more than the movement of small companies, which can make the index a slightly more useful measure of performance.

The problem with capitalization-weighted indexes is that if the largest names in an index are sufficiently large, they can blot out the sun and determine the index's performance on their own. This is almost the case of the S&P 500, which is increasingly determined by it's five largest constituents:

Those names represent over 20% of the index, and while there are certainly differences between them, it's not the most diverse list of securities ever assembled. Large cap technology companies performed comparatively well when working remotely became mandatory for a significant fraction of the population, but their experience has been very different from the rest of the stock market that the S&P 500 is supposed to represent.

Here's how the S&P 500's performance this year compares to an equal-weighted index with the same constituents: 

Source: ThomsonONE, May 27th

Source: Bloomberg, May 27th

You can see that the S&P 500 significantly outperformed its equal-weighted counterpart throughout this year. Before the pandemic took hold of the markets, the headline index outperformed the equal-weighted, rising to 5% above its 2019 end of year level. During the sell-off, the equal-weighted index fell 38% compared to 31% for the headline index, and the headline index has recovered better, too.

The point of all of this is that the casual CNBC viewer would be forgiven for thinking that the stock market is zooming right now. Things have definitely approved since March, but most stocks are still trading well below where they were at the start of the year.

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