The rally in the S&P 500 in 2023 has been one of the narrowest market rallies in decades meaning that a small handful of stocks have driven the majority of the index’s performance. This has significant implications for all diversified portfolios.

The S&P 500 Index

The S&P 500 index consists of, typically, 500 stocks and is capitalization-weighted meaning that larger companies, those that are worth more money, contribute more to the index’s performance than the smaller companies in the index.

S&P 500 stocks as of 7/25/2023. Source: www.YCharts.com

The above tables include 20 of the 500 stocks in the S&P 500. The top table shows the 10 LARGEST stocks in the S&P 500. For example, Apple is the largest with a market value (total value of all shares of stock) of $3.045 trillion! Even though Apple is just 1 of 500 stocks in the index, its stock performance has a huge impact on the performance of the overall S&P 500 index because it is the largest stock by market value in the index. The impact of this is explained below.

On the other hand, the second table shows the 10 SMALLEST stocks in the index. These stocks are tiny as compared to Apple and the other large stocks. Because of their small size, the performance of their stocks has a very margin impact on the overall performance of the S&P 500 index.

The Impact of Just a Few Stocks

According to a paper from the Royal Bank of Canada, the S&P 500 was up +12.0% through June 7th but the “Big 7” (see box), as they call them, contributed nearly all of the index’s performance. As the graph shows, these Big 7 stocks gained an average of +69.0% while the rest of the 496 stocks in the S&P 500 were only up +2.5% (there were 503 stocks in the S&P 500 at that time).

Year-to-Date through 6/7/2023. Source: RBC Wealth Management Article. Performance includes dividends.

The impact of performance discrepancies such as this are significant. If you have a diversified portfolio of any kind, your performance is much more likely to be closer to +2.5% for the year and not +12.0%. Getting a return closer to +12.0% would require owning a disproportionately large amount of The Big 7 Stocks which is both unlikely and not a prudent long-term investment strategy or decision.

When just a few stocks are surging like we have seen during the better part of 2023, many investors look back and, of course, wish they owned those stocks. Even if, somehow, you had a crystal ball and could have known these Big 7 Stock were going to surge, the risk of investing in only these 7 stocks is extreme.

We used one of the industry-leading risk tools to evaluate such a portfolio and, on a scale from 1 to 100 (1 being very low risk and 100 being very high risk), a portfolio of these 7 stocks scored at 91! Of the 100’s of portfolios we have analyzed, I’ve never seen one with a risk score so high and, furthermore, have never known an investor with such a tolerance for risk.

Implications for a Super-Diversified Portfolio

Our Super-Diversified Portfolios are designed to have far less risk than a single stock index, such as the S&P 500, and risk that is nowhere close to a portfolio of just 7 stocks as discussed above. Therefore, you would expect a Super-Diversified portfolio to lose less value during bear market, exactly what happened in 2022, and either keep up or lag behind, sometimes more than other times depending on the performance of everything in the portfolio, during bull markets. Rallies such as in 2023, are just impossible to keep up with when the performance is being driven by such a limited number of stocks.

Since the end of June we have seen the market rally broaden a bit rising in July and pulling back some in August. Assuming the market continues to broaden, with more stocks participating in the gains, we would expect to see our Super-Diversified Portfolio’s performance continue to improve.

We have seen market environments such as in 2023 come and go. The performance of our Super-Diversified Portfolios will ebb and flow depending on the market environment…this is entirely as expected. I believe our portfolios will continue to produce great long-term returns as there is nothing to suggest otherwise.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Any specific securities or investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own situation before making any investment decision including whether to retain an investment adviser.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions.  Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. This content was created as of the specific date indicated and reflects the author’s views as of that date. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results.  Any comments about the performance of securities, markets, or indexes and any opinions presented are not to be viewed as indicators of future performance.

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Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. For more information on specific indexes please see full disclosure here.

Any charts, tables, forecasts, etc. contained herein are for illustrative purposes only, may be based upon proprietary research, and are developed through analysis of historical public data.

All corporate names shown above are for illustrative purposes only and are NOT recommendations.

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