S&P 500 And The Future Of Equity Markets

A few weeks ago, I published an article where I discussed my view of the equity markets and predicted some of the activity to expect from them in 2019. This week, we will dive deeper into one of those markets for a more in-depth analysis. We will be examining the S&P 500 first, before continuing onto the Nasdaq, Dow and Russell indexes.

The S&P 500 index doesn’t get as much focus from news outlets as the Dow Jones Industrial Average or Dow as it is known. The reason the Dow gets most of the attention is because the number is larger, and reporting on hundreds of points movements is much more exciting than a report on tens of points. However, there are two problems when using the Dow index as a market barometer. The first is the method for calculating the index value, and the second is the composition of the index itself.

How Is the Dow Index Value Calculated vs. Other Indexes?

The Dow Jones Industrial Index is the world’s only price weighted index. This means that the stock within the index with the highest price has the most influence on the index itself. A $1 move in a $100 stock would move the index more than a $5 move in a $30 stock, even though the latter had a more significant percentage move.

In comparison, the S&P 500 and other indexes are market capitalization, (Market Cap) weighted. Market cap multiplies the current price of the stock by the number of shares outstanding. The largest influence this way would not necessarily be the most expensive stock, it would be the one most widely held in people’s portfolios, which provides a more accurate picture of the markets.

The S&P 500’s composition is also a better representation of the stock market and the American Economy as a whole. As you can see below, the Dow is over weighted in the industrial sector and utilities are not even included in that index.

Dow Jones sector allocation vs S&P 500 sector allocation

Market Outlook for the S&P 500

Let’s dive deeper into the S&P 500 index and see what it has to say about its future and the future of the American economy. Remember, people invest in the stock market based on what they expect the future economy to be. Traders and investors will buy stocks in advance of bullish economic data and will sell off or short the markets when they fear a recession.

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