Not only did the U.S. stock market rebound this year, it also changed shape
First, let’s recap the recovery: The Dow Jones U.S. Total Stock Market Index, which includes every exchange-listed stock in the country — 4,317 of them at the end of last month — sank 24.5% from January through March 9, then rallied 56.8% through Oct. 30 for a 10-month gain of 18.4% on a total return (dividends included) basis.
Fund manager Baron: ‘Stocks are cheap’
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That is the story most investors know. But underneath that storm-to-sunshine surface are currents and eddies that a savvy navigator ought to be aware of.
For example, small stocks fared the worst through March 9, falling 29% in less than three months versus drops of 25% for mid-sized shares and 24% for large stocks. But small equities rallied the strongest thereafter, rocketing 78.6% and surpassing the 72% gain for mid-sized and 54% rise for large stocks.
By Oct. 30, though, it was mid-sized stocks that had posted the largest 10-month gain: 29.6% compared to advances of 26.9% for small-caps and 17.3% for large stocks. The middle segment is often the market’s sweet spot, where risk and reward are balanced a bit more effectively.
A look through the growth-value prism offers a somewhat different perspective. Value stocks took it on the chin through March 9, sinking 29% while growth retreated 20%. Come the rebound, though, both styles rallied similarly: growth gained 56.4% and value increased 56.9%. The result is that the 10-month scorecard reads growth up 25.5% and value ahead by a little more than 11%.
Within the growth segment, mid-sized stocks landed in the middle during both the down and up periods, but ended on top for the year through Oct. 30 — up 37.8% versus advances of 30.8% for small and 24.9% for large stocks. Not even small stocks’ 75% jump in the latter period fully compensated for their 25.3% drop in the former.
But in the value segment, performances were inverse to stock sizes. The result on Oct. 30 was that small stocks had risen the most (23.2%), followed by the mid-sized (up 20%) and large (10% higher) groups.
All this has produced composition changes in both the growth and value divisions of the market. Last Dec. 31, growth and value each held almost identical 50% shares of the broad market, with value ahead by a mere 0.06 percentage point. By Oct. 30, growth had shrunk to 47.6% and value had expanded to 52.4%.
To be sure, this change was due mainly to reclassifying 128 companies from growth to value because their growth characteristics melted away in the bear market. Much of that shift occurred in the large-stock segment, which dropped to 42.2% of the broad market from 44.8% at the end of 2008. The weights of both the mid-sized and small segments rose slightly. (Style classifications are reviewed each March and September based on six factors including past earnings and revenue growth and future projections by analysts.)
Within value, the large-stock weight rose to 47.4% of the broad market by Oct. 30 from 44.4% last Dec. 31. The weights of the mid-sized and small segments also increased. By the way, 94 value stocks were reclassified as growth in September.
Carving the market into lines-of-business segments reveals other interesting alterations to the market’s makeup. To review the action: Technology performed the best among 10 big industries during the first part of the year, which is to say it fell the least, 13.4%. Its software sector dropped a bit less than hardware. While it did well in the rally (up 70%), it was not the best performer among industries.
That honor went to Financials, which soared by a stunning 97.8% from March 9 through Oct. 30. Of course, the group plummeted 44% in the first two-months-plus — worst among the 10 industries — on top of the 48% shellacking it took in 2008. Insurance and banks did the worst on the way down and the best on the rebound.
Nonetheless, Technology did the best in the 10 months, with a gain of 47.3% and its hardware sector outpacing software. It was followed closely by Basic Materials, which jumped 45.3%
Ten-month laggards were Telecommunications, down 1.4% – it fared the worst in the rally with a 24.5% gain – and Utilities, which rose 2.3%. Financials ranked third with a 10.7% advance.
The upshot of all this is that Technology has almost surpassed Financials as the largest industry in the U.S. stock market. Technology carried a weight of 16.6% as of Oct. 30 – up from 13.2% on Dec. 31 – while Financials at 16.9% is up from 15.9%. But Financials accounted for 22.9% of the broad market as recently as the end of 2006.
Other industries that have lost weight this year are Consumer Goods, Health Care, Industrials, Oil & Gas, Telecommunications and Utilities. Others gaining weight were Basic Materials and Consumer Services.
Of course, the market and all its subdivisions remain considerably below the high-water marks of late 2007. The broad market is 30% lower. Even worse off are Financials (down 52%), Industrials (36%) and Telecom (39%), while the rest are off by less than the market.
By nature rather than design, nothing stays the same in the stock market, which poses challenges and opportunities for investors. The big picture suffices most of the time. But now and then it’s important to focus on all the moving parts behind the facade.