What is “The Market?”

“The Market has returned 8% per year, historically.”

“The Market has been up so far this year and we expect more of the same over the coming months.”

“With what’s going on in The Market these days, I think I’d rather stuff my money under my mattress.”

Whether it’s on the evening news, or when talking with a friend over breakfast, “The Market” is a term that you hear quite frequently. However, it’s not often that we actually consider what we mean by “The Market.” The term usually implies the S&P 500 or the Dow Jones Industrial Average, most likely due to the commentary of major media outlets.

The S&P 500 is a collection of the 500 largest companies in the U.S. measured and weighted by market capitalization (that is, the number of shares in circulation multiplied the price per share). For example, the largest company in the United States by market capitalization is Apple, Inc. (ticker AAPL). It holds the largest weighting in the S&P 500 at 3.18%.

Altogether, the S&P 500 makes up 99.9% of U.S. stocks by market capitalization, so it is the most robust measure of the U.S. stock market environment. The Dow is a price-weighted index of 30 large U.S. companies, weighted by share price. Obviously, this particular index has a much narrower scope than the S&P 500, although the two will normally correlate strongly.

Although the S&P 500 or Dow are typically what we refer to when we say, “The Market,” is that the true definition? These indexes are good indicators of what is happening in a portion of the greater financial markets. There are thousands of stocks in the U.S. that an investor could buy on the two major U.S. exchanges, but there are over 50 other major stock exchanges across the globe with thousands more stocks readily available. Since the U.S. stock market only represents about 40% of total publicly traded companies, asset managers must recognize that the other 60% of publicly traded companies across the globe could also be great investments.

It is safe to say that “The Market” is much larger than U.S. companies alone, and it is helpful to consider several different benchmarks when determining how stocks have been performing. For example, the S&P 500 has performed great in 2016, while the MSCI World ex USA Index, a compilation of developed-country stocks outside of the U.S., has lagged considerably. The combination of these two indexes tells us that financial markets have been mixed this year, although U.S. markets have been very strong.

At Whitcomb & Hess, we strive to look at the total market, including global equities, and determine the best investments for our clients over the long term. If you have questions about our methodology, please contact us and we would be happy to talk about our process.

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