If you have been watching the FANG stocks (Facebook, Apple, Netflix and Google) and Microsoft and Amazon, all the stocks have been up dramatically and maybe you had wondered should I own them directly? It turns out, you likely own them indirectly, at least more than you think you do. Most of us own index stocks, some of it tied to the S&P 500 index. (One of the reasons we own indexes is the index changes a couple of times a year, discarding “losers” and adding “winners” which means over time the index will increase).
In an article from mid February written by Lewis Krauskopf of Reuters, two stocks Apple and Microsoft because of their increase in value were now over 10% of the weighting of the S&P 500 index.
The last time it happened was 1982, according to Howard Silverblatt, senior index analyst of S&P Dow Jones Indices when AT&T and IBM was about 10.9% of the index. Is this good or bad?
The good news since the end of 2018 the S&P 500 has climbed 35%, if you own the index you have made money. If you owned Apple, the shares have doubled and if you own Microsoft the stock is up 80%.
Since the start of 2020, the index is up 4.4%, but 4 stocks Amazon, Alphabet (Google), Apple and Microsoft have accounted for 2/3’s of the S&P 500’s gain.
The bad news is you have to ask yourself are the gains sustainable? People such as Tim Hayes, chief global investment strategist at Ned Davis Research says no.
If you look at the top 10 companies in weight of the S&P 500, the top 10 account for 24.2% of the index. The last time there was such a concentration was in March 2000 when Goldman Sachs, Microsoft, Cisco, General Electric, Intel and Exxon accounted for 18% of the S&P 500 market cap.
Linking to dividend paying stocks, with every situation there is a glass half full possibility, is it good or not so good, it depends. If you are investing for the long term, you are not too concerned because part of your investment strategy is to be paid regularly with dividends. In the long run, indexes tend to go up – the trick is when you need to sell. What is evident you should look at tech companies themselves or index funds such as the SPDR Technology fund (which the writer owns). Quality matters to be offensive and defensive.
There are more questions than answers, till the next time – to raising questions.