S&P 500 Return Attribution: Its 1% economy | Hacker News Reader

S&P 500 Return Attribution: Its 1% economy

putnam.com

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What's with the editorialized title? The actual title is "S&P 500 Return Attribution," and the phrase "1% economy" appears nowhere in it.

It's not editorialized. "Those 5 stocks are up 37% on average while the S&P 500 is up 2%, and the remaining 495 stocks are down 5%."

5/500 = 1%.

The title is different from the title on the article, so it is editorialized.

It can be mine mistake, is it not allowed?

Generally not. The guidelines say you should submit the actual title, unless the title is clickbait, uninformative, otherwise misleading, or longer than the character limit.

Thanks. Should not have added my text.

It's market cap weighted, so they make up more than 1% of the index. Just based on the numbers shown (+2%, -5%, and +37%) they must represent about 17% of the S&P 500.

So those 500 stocks are now the "economy?" Its a very misleading title.

Stock market returns have always been about a small handful of big winners. It's one of the reasons why indexing usually outperforms stock picking.

The median stock actually performs worse than short-term treasury bills. In other words, cash is a better investment than most companies.

If only more people understood this. That being said, if your biggest and best stocks aren't going up, neither will your index. The question is whether inflated PEs are here to stay.

They are until the fed can no longer print money through various ways.

There is no country on earth that is immune from willy nilly central bank printing right now. So everyone is in the same boat.

Now... If someone figures out how to stop the central bank printing and keep things going, that will be a problem for USD.

Yeah, except that when you pick a company to invest in you are not just picking randomly. Just because most companies perform poorly, says nothing about the ability to single out high performing companies. This advise is completely flawed. Of course if you don't want to spend time on picking the right companies to invest in, an index will likely be a better and safer choice. But with an index, your gains will always be excessively capped. It's trading gains for effort spend. Not even risk. If there is a crash, indices will go down as well. By picking your companies wisely, you can run circles around any index.

Buying wisely is difficult enough. Another challenge in picking stocks is selling wisely.

It can be difficult to hold onto the winners and not sell them too early even as they suddenly seem expensive, you’re already up 3x or whatever, and besides there’s this shiny new IPO/turnaround/whatever where you could put the money instead...

Sticking with the index saves you from these bad decisions.

(I had some Apple stock in 2002 that I sold a year later; some Tesla in 2013 that I sold in 2016; some AMD and Nvidia that I sold in 2017; and some Shopify that I sold last year.)

Buy and hold is the better strategy. Even when you think a stock may be overpriced, you incur capital gains to sell and switch somewhere else. Usually better to just hold and defer the gains indefinitely.

> By picking your companies wisely, you can run circles around any index.

Proof? Warren Buffet couldn't do it. The vast majority of hedge funds, who's _job_ is to beat index funds can't do it. Of those that do, lose to index funds anyway because of fees. And these are all businesses that have several orders of magnitude advantage over an individual investor.

What do you mean "Warren Buffet couldn't do it"?

Sorry, I fumbled the phrasing of that a bit. Warren Buffet famously bet a million bucks that hedge funds couldn't beat the S&P 500 index. They couldn't, by a wide margin.

The Wall Street Journal has run an experiment for quite some time where staffers chose stocks randomly by throwing darts at a dart board, and compared the results of their picks to those of professional fund managers. The random picks almost always won. Here's an example: https://www.marketwatch.com/story/random-darts-beat-hedge-fu...

To do much better than the index over a long time frame would probably require a time machine.

> The median stock actually performs worse than short-term treasury bills.

I wonder if that is holding true when short term bills are yielding 0.1%. Thats sufficiently close to zero that it would imply the median stock has a negative return. I suspect that isnt true if you include dividends, though it might be true over longer timelines where T.bill yields were much higher.

I would prefer to see this comparison (top 1% vs the rest) for the NASDAQ.

To me it seems kind of normal, that tech is eating the world and is more volatile. So FAAMG making the rest of the S&P 500 look stuck in comparison is no surprise.

But does the same hold true if we compare FAAMG to the rest of the tech market? How about the rest of the software market? If so, that would be alarming.

It should be remembered that the S&P 500 is market cap weighted, and so will always be concentrated. This is nothing new:

* https://theirrelevantinvestor.com/2018/11/26/the-nifty-fifty...

* https://awealthofcommonsense.com/2020/07/the-nifty-fifty-and...

* https://en.wikipedia.org/wiki/Nifty_Fifty

And while the article isn't wrong, it may not show the whole story:

> While the S&P 500 is up a 3% or so this year, there are 142 stocks (as of yesterday’s close) in the S&P 500 that are up at least 10% or more. On the other hand, there are 220 stocks down 10% or more this year.

* https://awealthofcommonsense.com/2020/08/concentrated-in-the...

When the above article was posted (8/4), the top ten YTD percentage risers were, largest first: Carrier Global, DexCom, NVIDIA, West Pharma, PayPal, Abiomed, Regeneron Pharma, AMD, Amazon, Cadence Design Systems. Was anyone surprised that Clorox (53.7%) rose more than Apple (49.1%)?

The S&P 500 being concentrated is the same as it always was over the decades:

* https://etfdb.com/history-of-the-s-and-p-500/

* https://www.qad.com/blog/2019/10/sp-500-companies-over-time

* https://ritholtz.com/2013/02/visual-history-of-the-sp-500/

AT&T was in the top ten for seventy years.

Absolutely no one was excited about the S&P 500 during the "Lost Decade" of 2000-2009, but now people are probably too excited. Everyone is freaking up about the un-reality of the stock market: let's see how things go for the next ten years and decide then.

>There are a handful of stocks doing the heavy lifting and driving YTD returns in the S&P 500 index.

This is interesting, and this analysis is done for 2020 returns only. Were the same analysis be done for any other year, like 1995 or 1985 or 1975, we might find a similar dynamic. Which might make the insight here less interesting.

I would love to see a return distribution, not by day, but rather by stock, to see to what extent the distribution is right tailed. I suppose the answer is very.

i would be interested to see how the return distribution varies (if it does at all) over the medium/long term 5yrs+ - i bet it does varies - and that’s the whole point of the index - it’s not news that some stocks do better in the short terms than others. the real question is which ones are good in the long run... so i think this article is rather pointless in its essence

> i would be interested to see how the return distribution varies (if it does at all) over the medium/long term 5yrs+

As the P/E goes up, the expected return goes down; see Schiller / CAPE:

https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-e...

This has happened to popular companies before:

* https://en.wikipedia.org/wiki/Nifty_Fifty

Is there an S&P 5 index fund or ETF?

S&P 100, Russell 50/200:

* https://en.wikipedia.org/wiki/S%26P_100

* https://en.wikipedia.org/wiki/IShares_S%26P_100

* https://en.wikipedia.org/wiki/Russell_Top_50_Index

* https://en.wikipedia.org/wiki/Russell_Top_200_Index

Given that the most popular high-flyers are tech companies, you can go with the NASDAQ perhaps:

* https://en.wikipedia.org/wiki/NASDAQ-100

Though generally speaking, diversification generally gets better results:

* https://www.pwlcapital.com/should-you-invest-in-the-sp-500-i...

And don't forget some bonds, so when the inevitable dips occurs (e.g., March), you have something you can liquidate to rebalance:

* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...

if you're only dealing with five stocks, why not just rebalance your holdings yourself every month or so? plenty of zero-commission options these days.

No need to rebalance if it is market cap weighted

You need to rebalance if the stocks included in your top 5 index change, i.e. if some new stock displaces one of your original 5. Otherwise you've got a fund of 5 stocks chosen by some metric on historical date blah -- which may be a reasonable idea but doesn't seem to align with the spirit of "S&P 5".

ETF format can more easily defer capital gains with losses. Though the more stocks in the index, the more economic situations in can do this. It wouldn't be possible if the index was just 5 stocks and they all gained disproportionately.

At a top 5 level, it's pretty straightforward to just invest in the individual stocks. You could rebalance now and then if you want to keep a particular weighting formula but there's nothing magic about the way that indexes weight.

How do you test the historic returns of this strategy?

I assume the composition of the S&P 500 is a matter of public record. As is the stock price of public companies. Seems pretty straightforward. I don't know if the exact weighting formula is public but you could at least approximate.

You're essentially looking at replicating the DJIA for companies that may not be on the Dow Jones. Part of me assumes this has been done but interesting.

The real trick would be if you could select the 5 stocks to include in the fund based on the largest future price appreciation rather than something simple such as the top 5 stocks with largest market cap.

The Russell 3000 is also up YTD, but is also cap-weighted and therefore I suspect most returns are from the mega corps.

Many people (politicians?) like to point to the S&P 500 when talking about stock market growth.

What is a better index or metric that captures the overall health / growth of the economy?

none of them?

stocks have never been more detached from the underlying economy than now - i mean look at the total market cap of US stocks to GDP - it’s something like 170%

> stocks have never been more detached from the underlying economy than now

Economic indicators (CPI, GDP, unemployment) are backwards looking, while stocks are generally forward looking.

The S&P 500 peaked around mid-February and then started tanking. Meanwhile, in early March:

> On March 2, New York City Mayor Bill de Blasio tweeted that people should ignore the virus and "go on with your lives + get out on the town despite coronavirus."[73][74] At a news conference on March 3, New York City Commissioner of Health Oxiris Barbot said "we are encouraging New Yorkers to go about their everyday lives."[75]

* https://en.wikipedia.org/wiki/COVID-19_pandemic_in_New_York_...

Cuomo then declared a state of emergency on March 7—at least two weeks after stocks started 'acting'.

The stock market (as 'an entity') dislikes unexpected news: as new information ripples out, the Efficient Market Hypothesis purports that will effect prices. So if a company says a quarter or two will be good, and it turns out bad, their stock price will effected by that new information. But if everyone already knows that things will be bad, when the bad news is announced there won't be much of a reaction.

You can have bad news as long it's expected: the pandemic was unexpected and so everyone had to re-organize their strategies. That was February to March.

Now that the pandemic is more of a know quantity, and its effects of society are more well-known, people can focus on how companies will deal with it: it's generally bad for cruise lines and airlines (stocks down), it's generally good for companies that help with work/shelter-in-place stuff like Zoom/telcomm and cloud (stocks up). What was April onwards.

Yes, the economy does suck. But stocks are about forward looking expectations, not about the now or past.

i don’t think you can look at Tesla surpassing Walmart in market cap today and rationalize it as normal forward looking behavior when there’s been zero news over the last 10 days outside of a stock split, which in theory should have zero impact on the market cap

my point is we aren’t living in a world where a stock is simply the present value of future cash flows and no one should rationalize the market as such

It's going up because it has gone up. See the momentum investing factor:

* https://www.investopedia.com/terms/m/momentum.asp

Also, it has just recently become eligible to become part of the S&P 500 (through some perhaps 'amusing' accounting), so a bunch of folks may be front running it's possible actual inclusion:

* https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...

Though long-term stock holders may not actually want inclusion:

* https://www.nber.org/papers/w27593

that has nothing to do with forward expectations, which is my point.

It has gone up for the last little while, so the expectation is that it will continue to go up. From the article I linked:

> When applied, an investor can buy or sell based on the strength of the trends in an asset's price. If a trader wants to use a momentum-based strategy, he takes a long position in a stock or asset that has been trending up. If the stock is trending down, he takes a short position. Instead of the traditional philosophy of trading—buy low, sell high—momentum investing seeks to sell low and buy lower, or buy high and sell higher. Instead of identifying the continuation or reversal pattern, momentum investors focus on the trend created by the most recent price break.

Momentum is a recognized factor in investment returns in peer-reviewed research:

* https://en.wikipedia.org/wiki/Factor_investing

If that's what you believe then you can always put your money where your mouth is and go short on Tesla.

there’s no point in trying to act rationally when the market is in extreme moral hazard mode.

> there’s been zero news over the last 10 days

Everything in the world effects everything else in a very complicated manner. Almost anything that happens will have some indirect effect on tesla / walmart.

I wont pretend to know the reason, or that there is a reason this particular time. But indirect news do affect prices regularly.

Inflation expectations. Inflation hits different companies differently. Companies with a strong brand and a strong moat, ones that basically define their categories, can raise prices as much as they want. Companies that produce an undifferentiated commodity product get undercut by competitors when they try to raise prices.

People buy a Tesla because they want a Tesla. Any old car will not do - the typical Tesla buyer is not considering a Toyota or a Subaru or even a Leaf. (They also tend to be fairly high-earning, and in a profession where they can capture much of the increased prices from inflation.) When more money goes into the economy, Tesla's buyers capture a good fraction of it, and then Tesla can raise their prices to match.

Nobody shops at Walmart because it's Walmart. They shop at Walmart because Walmart has the lowest prices. Now, Walmart is being undercut by Amazon (whose stock is rising as they steal business away from Walmart). If there's inflation, will Walmart be able to raise prices? Probably not by very much, because if they do, Amazon holds their current prices and Walmart loses even more business to them.

It's the same story for Apple, which has roughly doubled in the last 4 months. Did the value of Apple double in the last 4 month?. Certainly not in real terms. But in nominal terms - probably. I could easily see a future where prices in general are double today in 5-10 years, and the price of an iPhone is likely to rise to keep pace. During the 1970s, prices rose by roughly 10x on average, though the impact was widely disparate on different professions. (At the beginning of the decade, my mom - a teacher - was make maybe 20-30% less than her engineer/lawyer/academic friends. At the end of it, they were making about 3x what she was.) If anything, the market may be understating the effect of inflation on certain company's earnings, perhaps because a lot of people don't believe we're going to get inflation.

> stocks have never been more detached from the underlying economy than now

maybe so.

> i mean look at the total market cap of US stocks to GDP - it’s something like 170%

but doesn't this make sense? I would expect the total market cap of public companies to be worth more than a single year's productivity.

its a relative measure - meaning it’s never been higher than it is now

specifically it’s the ratio of the wilshire 5000 over GDP

I don't understand how you can draw any conclusion from the ratio. Not all of GDP comes from the public companies in the wilshire 5000. If we pretend it did, wouldn't 170% be a P/E ratio "in disguise"? In which case 1.7 is very, very low as P/Es go.

It seems to me that 170% is clearly not evidence of the stock market being overvalued, while not being clear evidence it is undervalued either.

If you disagree, what tells you the appropriate number? It seems like not knowing the portion of the economy outside the stock market, and whether it has gotten bigger or smaller, rules out knowing what the ratio means.

Another thing I just thought of is that public companies draw on the global economy, but the "D" in GDP is domestic.

And yet another thing I thought of is, what about the Net Domestic Product? TIL there is such a thing, although it isn't tremendously smaller than GDP. It appears substituting it would bring the ratio closer to 200% or 2:1.

GDP is much more like revenue than earnings... but 1.7x price/sales ratio is still on the low end.

> stocks have never been more detached from the underlying economy than now - i mean look at the total market cap of US stocks to GDP - it’s something like 170%

I haven't done the research, but: how much have the underlying dynamics changed, though? Has concentration increased the percentage of GDP that goes through public companies?

In other words, if 20 years ago, 25% of GDP flowed through US public companies, and now it's 35%, you'd expect the ratio of public companies' capitalizations to GDP to increase a lot.

I'm not saying this is good or bad, but it wouldn't be "detached from the underlying economy", it'd be a direct reflection of it.

Stocks are a bad estimator of the current economy, they’re a good estimator for the general expectations for the future economy.

Not true. If no one has capital to invest then less people will buy stocks even if expectations are high. The price of stocks also reflect the current spending power of actors in the economy.

GDP growth, Consumer Confidence Index, Unemployment Rate. I'm not sure there is any one thing but you can get insights from a range of signals.

How does this compare to pre-covid S&P 495?

Stay away from following anything that looks like advice in these comments. I'm frankly shocked at some people's opinions on investing here.

I meet so many investors who think they are geniuses because the portfolio they constructed did so well.

One of the best lessons I've heard about risk is that you don't judge a decision by the outcome, but by the risk being taken when the decision is made.

For example, go to a casino and put your life savings on 10. If you win, did you make a good decision? No.

That's what people who pick stocks are doing. Just massive amounts of hindsight bias and survivorship bias.

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