The stock markets of 2012 have in some respects resembled those of previous years: There was a hot start early on, followed by a cooling-off period as the weather got warmer. But there’s been a big reversal this year, one that isn’t readily apparent until you start digging into the numbers. The leaders among stocks this year, unlike the recent past, have been the largest companies in the indexes, the so-called mega-caps.
Leading the way has been the S&P 100, the 100 largest companies by market capitalization contained within the S&P 500. The S&P 100 has an average market value of $82.2 billion while the larger index’s average company has a market capitalization of $25.5 billion. So these are by far the biggest companies in America.
As of earlier this week, the mega-caps of the S&P 100 have returned 7.7 percent year-to-date. A report by Bloomberg News adjusted the overall S&P 500 to strip out the weighting adjustment for market caps, and found that the rest of companies in there had returned just 5.1 percent this year.
That’s a big reversal from recent years. From when the market totally bottomed out on March 9, 2009, through the end of last year, those 100 largest companies that make up the S&P 500 had come back strong, returning 77 percent. Meanwhile, the average company in the S&P 500 was much stronger, returning 128 percent.
Overall, the mega-caps haven’t beaten the rest of the S&P 500 by as wide a margin as they’re showing this year since 1999. And even that year was a bit of a fluke. The S&P 100 gained 31 percent in 1999, beating the wider index by 11.7 percentage points. But to find a wider margin of victory than that for the mega-caps, you have to go all the way back to 1976.
The market plunge that started in 2000, although generally attributed to the downfall of the high-flying dot-com stocks, decimated the mega-caps as well. The S&P 100 lost 53 percent of its value from its peak in March 2000 through the market’s low in October 2002. The wider S&P 500 lost 49 percent over that same period.
Although there have been years since then when the 100 outperformed the 500, the margin has never been very wide, and the mega-caps never really made up ground over the following decade. From March 2000 through the end of December 2011, the S&P 500 lost 19 percent, a lost decade, but the S&P 100 lost 22 percent.
So this year’s reversal of fortune appears to be significant. Unusually, though, the Dow Jones industrial average, made up of 30 of the largest American companies, is up just 2.5 percent on the year. That’s not only well below the S&P 100 mega-caps, but trailing the entire S&P 500 as well. What’s the difference?
All 30 of the Dow companies are in the S&P 500, but two of them don’t squeak into the S&P 100: Alcoa and Travelers. Those stocks are both up on the year, though, so that’s not the answer.
Maybe the biggest reason is very simple: Apple. Apple is a huge part of the S&P 100, while it’s not part of the Dow Jones average. As the largest company in the entire country, Apple makes up nearly 6 percent of the overall S&P 100. Apple is up by roughly 45 percent on the year, and as the stock with the biggest market cap, it has a disproportionate effect on the S&P.
There are plenty of stocks in the S&P 100 but not in the Dow that have performed strongly this year. Costco, for one example, is up more than 8 percent on the year. Or take the little-known Gilead Sciences, a biotech firm based in Foster City, California. It’s not nearly significant enough to make its way into the Dow, yet its market cap of nearly $38 billion places it in the S&P 500. And its stock is up 21 percent so far in 2012.
With fewer stocks in the Dow, that index is a portrait of a much smaller slice of the market. That means a handful of underperformers can really play havoc with the Dow. For instance, McDonald’s stock is down by more than 11 percent on the year so far. When a company like that makes up 1 percent of an index, as it does in the S&P 100, such a drop becomes little more than noise, but McDonald’s has roughly three times as much effect on the Dow.
So it’s not just a handful of stocks – or a single stock like Apple – leading the mega-cap rally. The wider the net you cast for meg-caps, the greater the return you find. That could be the signal of something very significant happening in this year’s market.
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