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Although U.S. stocks recovered in the fourth quarter, 2015 was an extremely frustrating year for most investors. The major stock market indexes showed flattish performance for the year, but only because the largest-capitalization stocks did well.
In other words, the performance of the indexes masked the fact that the average stock struggled and misery was widespread.
One picture “paints a thousand words” of what happened in 2015. As background, the Standard and Poor’s 500 Index is a capitalization-weighted index. Recall that a stock’s “market capitalization” or “market cap” is simply the stock price multiplied by the number of shares.
So, if XYZ Corp.’s stock is $50 per share and there are 10 million shares outstanding, XYZ’s market cap is $500 million. The S&P 500 has 500 stocks, but the weighting of each is determined by its market capitalization. This is why the S&P 500 (like most indexes) is capitalization-weighted.
The S&P 500 itself actually lost 15 points in 2015 (adding in dividends led to a slightly positive total return). According to Strategas Research Partners, the 10 largest-capitalization stocks (i.e. 2 percent of the 500 stocks) have a combined S&P 500 weighting of 18.8 percent. As a group, those 10 did very well and accounted for 30.6 index points, or 304.8 percent of the S&P 500’s points for the year.
The performance disparity between those 10 largest market-capitalization stocks and the other 490 stocks in the S&P 500 can be seen in the accompanying graph. The 10 largest stocks were up 17 percent in 2015. The S&P 500 was down 1 percent. The S&P 500 without those 10 largest market-capitalization stocks was down 5 percent. The upshot is, if you did not own a significant amount of those 10 stocks (particularly Amazon, Microsoft, Google, General Electric and Facebook), you sailed into a very stiff performance headwind in 2015.
We’re not Pollyannas, but take solace that stocks faced a number of strong headwinds in 2015 without suffering even greater damage. Commodity prices continued to plunge (particularly oil), decimating earnings and freezing capital spending in the sector. Strength in the U.S. dollar and China’s softening economy and weakening currency also hurt U.S. manufacturers. Finally, the Federal Reserve finally raised its target for short-term interest rates.
We don’t know if or when the pressures noted above will abate and neither does anybody else. We can’t control any of those things, so will continue to look for companies with solid business prospects, sound financial structures and strong, shareholder-oriented management teams whose stocks are selling at a significant discount to our evaluation of intrinsic value.•
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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Indiana. He can be reached at (812) 376-9444 or mickey@kirrmar.com.
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