It’s a Market of Stocks, not a Stock Market

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In the financial press you hear a lot of talk about “the market”: the market is up, the market is down, the market is jittery, and so on. Sometimes they’ll cite a specific index, such as the Dow Jones Industrial Average or Standard & Poor’s 500, using them as shorthand for the stock market as a whole.

This is a generalization, of course. There is no single monolithic “stock market” that tracks the performance of all publicly traded companies. What happens with one company’s stock price may not be happening with others—even within the big indexes.

For example, the S&P 500 Index rose 19.81% in 1999: the peak of the dot-com bubble. According to Standard & Poor’s sector research, the tech sector of the S&P Index went up a whopping 98.27% that year while boring sectors like consumer staples and utilities actually went down. “The market” had a great year, but a tech-heavy portfolio fared much better than a portfolio invested in old economy stocks. The reverse was true the next year, when the tech bubble popped and S&P’s tech sector dropped over 40% while banks, utilities, and staples went shooting up.

We find S&P’s index to be a useful barometer for the stock market as a whole and are sometimes guilty of using it as a generalization for all stocks. But it’s important to remember that the index is still made up of individual stocks, each with their own story.

Sometimes when you average all of those stocks together some compelling stories can get lost in the mix. Some advisors recommend a broad-based index approach, hoping that overperforming stocks will balance out underperforming stocks. While there is a time and place for indexing, we would really just prefer to own the overperforming stocks and try to leave the others out of it. Obviously this is not really feasible—we cannot know in advance which stocks will do well. However, we believe we can try.

As contrarian investors, we are interested specifically in stocks that look like they have the potential to buck the trend of the market. When there’s a stampede, we prefer to be running the other way. So it’s little surprise that some of our favorite holdings may be up when the indexes are down (or, unfortunately, vice versa.)

At 228 Main, we often deal with generalizations about the market because of the broad scope of our writings. If you want to talk specifics, call or email us and we’ll see if we can help.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.