Summary
- Of the 4 major US market indices, the Dow Jones Industrial Average (Dow) so far has had the least drawdown from its peak since the start of 2022.
- The recent surge in valuation of Nvidia (NVDA) has made it one of the top 5 companies within S&P500. ExxonMobil (XOM) is once again one of the top 10 companies within the S&P500.
- While major the big semiconductor companies are very expensive, with the surge in success of machine learning, and in particular the recently seen impressive successes in generative models and their use in various industries, the demand for hardware accelerators may continue to maintain.
- The Dow and Russell2000 currently contain roughly 20% and 14% concentration in the financial sector, respectively. With the recently seen stresses and the failure of regional banks, it would be interesting to watch if these indices will highlight pronounced sell offs in the coming weeks and months.
- Past performance is not indicative of future performance
The four major US market indices reached their all-time high (ATH) close to the start of 2022. Over a year has passed since then and these indices are still in bear market territory. As of this writing, the S&P500, Nasdaq, Dow, and Russell 2000 indices are roughly -20%, -30%, -13%, and -22% since their ATH.
During the past 5 recessions (1980, 1987, 2000, 2008, and 2020), the average duration for the S&P500 to reach back to its all-time time was 1240 days. The average duration for S&P500 to recover to -20% of it's all-time high after bottoming out was 539 days. In the case of Nasdaq, the numbers are more gruesome: on average, it took 1626 days to reach back to its all-time high, and 1234 days to retrace back to -20% of its all-time high after bottoming out. This may indicate that there is more time required for mean reversion since the US markets are still expensive compared to relative to their historical PE ratios.
The major market indices are mostly flat since the article comparing composition of market indices was posted. Even so, as indices (and the index funds and ETFs tracking them) are continuously updated their composition has changed. The weights of individual companies within each index has changed, and some companies that were previously listed (for example under Russell 2000) have been removed or since gone bankrupt.
This post digs deeper into each index and shows a new snapshot of their composition and their performance since 2022.
Current Snapshot
Before looking at the breakdown of each index, let's look at the performance of each index since January 2022. While the start January 2022 was not precisely the all-time high of all indices, it was relatively close.
Table below shows the performance of investing in four ETFs that track each of the four indices using two separate investing strategies: 1) Buying the ETF on the first trading day of 2022 and holding 2) Evenly and monthly distribution purchase of each ETF on the first trading day of the month starting January 2022.
| Strategy | SPY (S&P500) | QQQ (Nasdaq100) | DIA (Dow30) | IWM (Russell2000) |
|---|---|---|---|---|
| Buy and Hold 2022-01 | -14% | -22% | -9% | -16% |
| Monthly DCA | -2% | -3% | -2% | -3% |
Monthly DCA would have yielded very similar returns (losses) in each index. But not that the yields listed in the table above are not inflation adjusted. If we consider opportunity cost and inflation, the losses are more pronounced.. Note that some of the current money market funds offer a 7-day yield of roughly 4.5%.
Seven companies (AAPL, MSFT, CSCO, HON, AMGN, INTC, WBA) continue to overlap between the S&P500, Dow, and Nasdaq. Despite the large drawdown in the tech sector over the past year, the technology sector continues to be the largest weighted sector in S&P500, Nasdaq100, and the Dow.
S&P500
The technology sector still makes up over 20% of the S&P500, the largest sector. Relative to their sector weights viewed previously viewed, the financial sector has increased the most (~25%) while communication sector has declined the most (~12%). While these numbers seem significant, note on this relative scale, an increase in weight from 11% to 13% constitutes roughly a 18% relative increase.
More interestingly are weights of the top 10 companies in S&P500. Apple (AAPL) still maintains the largest weight in S&P500, while the weight of Nvidia has increase by almost 50% (from 1.18% to 1.32%) making it the fourth largest weight of S&P500. Johnson & Johnson (JNJ) is no longer in the top 10 list, where ExxonMobil (XOM) has taken its place.
Nvidia is still roughly -20% negative from the start of 2022. But with the benefit of hindsight, dollar-cost-averaging $1000/month into NVDA since the start of the bear-market would have yielded roughly a very handsome 25% return as of this writing. Most of these gains may be attributed to the rapidly growing adoption of machine-learning in every domain coupled with the very impressive recent successes in generative models, coupled with the massive AI FOMO seen earlier at the start of the year.
With Nvidia accelerators still dominating in these areas due to their performance coupled with Nvidia's programming model (CUDA) being routinely adopted and supported in existing software stack, they may continue to dominate. But with AMD's (AMD) latest accelerators, and effectively copying the CUDA API for their software stack, increase support for their hardware in various libraries, coupled with their relatively recent acquisition of Xilinx and potential in scaleing out, they may prove to be a very worthy contender to Nvidia's dominance in this domain.
The figure below provides a snapshot of the mean performance of the individual companies within S&P500 since the start of 2022, compared against the maximum drop seen by the companies during the 2020 recession. The energy sector, which saw significant drop during the 2020 recession, has been the best performing sector. Larger cap companies in the healthcare sector including Eli Lilly and Company (LLY) and (MRK) had controlled drawdowns during the 2020 and have had positive returns since 2022.
Dow
Dow Jones is a subset of S&P500 where the individual companies have higher weights. With the exception of Apple (AAPL) and Microsoft (MSFT), all other companies within the Dow have a considerably higher weight compared to the S&P500.
The Dow is still missing exposure to sectors including utilities and real estate. This index currently has close to 21% exposure to the financial sector, which is almost 40% more than the S&P500. While the Dow has out-performed the S&P500 since 2022, it will be interesting to watch whether the trend will continue given the recent concerns raising in the financial sector and the Dow containing two of the 'systemically important banks'.
Since 2022-07, with the exception of consumer cyclical which has remained unchanged, other weights of other sectors within the Dow have followed a trend similar to that of S&P500. That is, financial services gained the most weight (relative to previous weight), while the technology sector lost the most weight.
Nasdaq 100
The index, as before, continues to be very tech-heavy, with the technology sector making up close to 50% of the total composition of the Nasdaq 100. If one were to bundle and categorize Tesla (TSLA) and Meta (META) as falling into the technology sector, then the total weight of the technology sector in Nasdaq100 would be close to a whopping 60%. This would not be much far-fetched as some analysts have attributed the historically high PE ratio of Tesla to it being "more than just a car company".
Apple (AAPL) and Microsoft (MSFT) continue to hold the largest weights in the Nasdaq 100, currently comprising roughly 25% of the total weight of the index. With the increasing collaboration of Microsoft and the integration of its products with OpenAI, it will be interesting to see how Nasdaq100 performs into 2024.
Roughly 75%, by weight, of the equities in Nasdaq-100 continue to be represented as roughly 30% (by weight) of the equities in S&P500. These include other big name companies such as Amazon (AMZN), Nvidia (NVDA) and Pepsi Co (PEP). Following figures shows the difference in the weights assigned to overlapping components of Nasdaq-100 compared to the S&P500 and Dow. Similarly, currently roughly 20% of the Dow (as weight) may make up roughly 30% of the equities (by weight) in the Nasdaq-100.
The figure below provides a snapshot of the mean performance of the individual companies within Nasdaq100 since the start of 2022, compared against the maximum drop seen by the companies during the 2020 recession. With the technology sector having the largest drawdown coupled with the virtually nonexistent exposure to the energy sector have contributed to the Nasdaq being the worst performing index since 2022.
Russell 2000
The current market cap of the ~2000 companies in Russell2000 varies from ~350M to $10B. Since the previous post, some of the companies previously listed under Russell2000 (e.g. HyreCar) are have been removed or have filed for bankruptcy. The financial institutions currently make up roughly 14% of the index. With the recent concerns and stresses observed in financial institutions and especially to in regional banks, it will be interesting to see whether they will weigh down Russell2000 in the upcoming weeks and months.
The figure below provides a snapshot of the mean performance of the individual companies within Russell2000 since the start of 2022, compared against the maximum drop seen by the companies during the 2020 recession. A notable number of the companies contained in Russell2000 dropped by over 80% during the 2020 recession, and since have maintained over 50% loss since the start of 2022.
