Remember when energy stocks dominated the S&P 500 Index ($SPX), and one company, Exxon Mobil (XOM), was the single largest weighted component?
Admittedly, although I was managing money at the time, I needed a quick refresher. I imagine many other investors are in the same spot – or they might not even believe me.
In the current market, in which everyone is infatuated with technology stocks, the more artificial intelligence, the better. Even if it is as fleeting as a headline announcement about a partnership, or something like a corporate name change that includes “AI” in the new title. Energy stocks are past-tense, relatively speaking, as one of the smallest parts of the S&P 500.
Let this serve as a stark reminder to us.
Few of us can even consider the possibility that tech stocks, much less the iconic Nvidia (NVDA), could one day be relegated to being as small a part of the capitalization-weighted index as XOM is now. Twelve years after it sat on top of the market-cap mountain, the oil and gas giant checks in at 0.84% of the S&P 500 SPDR ETF (SPY).
NVDA is not only sitting at 8% of the SPY, it is also a shade under 10% of the Nasdaq-100 Index ($IUXX) as well. That has a lot to do with how correlated the two major stock market trackers have become.
And while this might not be a “today” issue, I think it will be a problem at some point in the not-too-distant future. Part of it is perception, and part is a widespread misunderstanding. It all threatens to break the cardinal investing rule of “know what you own.” Because only when you do, can you understand and recognize the risks you are taking every market day.
Investors who see their 401k plan investments are mostly or fully invested in an “S&P 500” fund could be forgiven for thinking they are well-diversified. 500 stocks, that’s a lot! Plenty of backups in case a stock here or there punks out on us.
Nope. Because most of the stocks in the S&P 500 do not move the index. Just look back above at that list of top S&P 500 holdings. If XOM literally went to zero in a day, while the rest of the market broke even, the index would lose less than 1%. Because 100% lost on a 0.84% holding is 0.84% lost.
That’s the same impact NVDA would have if it dropped 12% in a single day. That is also out of the range of normal, but do note that this past January, that stock fell 17% in a day. And it fell more than 4% in a single day last week.
NVDA was off 4.4% during the daily trading session on Tuesday, Oct. 14. It is about 8% of the S&P 500 index. Multiply those together, and that means NVDA alone had a negative impact of 0.36% on the S&P 500 that day alone. The whole index was down 0.12%. In other words an S&P 500 without NVDA would have actually been up 0.24%.
Yes, this is just fleeting math calculations. But the point remains: a single stock that makes up 8% of the most followed index in stock market history is a red flag.
It is about more than numbers. It also relates to the potential for investors to make decisions without adequate information. Yes, the information exists, and it is easy to find. But it may not be obvious.
That puts the burden on us writers and analysts to share these “eyes wide open” analyses when it comes to super stocks like NVDA and the historic degree to which their stock prices impact our financial lives.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com