June 17, 2020

“The Market” has Recovered its Coronavirus Losses, but Most Stocks are Down Year-To-Date

How we, as investors, define “the market” can obscure actual investment experiences.  To illustrate, look at the following four measures of 2020 year-to-date returns through June 16th.

  • S&P 500 (Large U.S. Stocks): -2.4%
  • Russell 3000 (Broad U.S. Stocks) -2.8%
  • Russell 3000 median stock: -17.6%
  • FAANG[1] (equal-weighted portfolio): 23.9%

Two common measures of U.S. stock performance, the S&P 500 and the Russell 3000, have recovered just about all the Coronavirus losses with YTD returns down in the low single digits.  An investor who views “the market” through the lens of broad index returns would see a market that is about flat.

For those that own or focus on the lesser known names that make up the vast majority of the U.S. stock market, they likely see the market as being down substantially.

Finally, an investor who focuses on large technology stocks, particular those that make up the “FAANG” group, sees a market that is up over 20% YTD.  Much has been said and written about the “FAANG” stocks and how well they have performed this year through the pandemic; great news if you happened to own those particular stocks.

The variation in how investors might perceive the performance of U.S. stock in 2020 is not surprising considering the historical composition of stock returns.  Over time, the vast of majority individual stocks deliver poor returns.

A 2018 paper by Arizona State University professor Hendrik Bessembinder, “Do Stocks Outperform Treasury Bills?”, underscores the concept that relying on picking just the right stocks is a recipe for poor long-term investment performance. According to Bessembinder, out of 25,300 companies in the Center for Research on Securities Prices (CRSP) database since 1926, “the 1,092 top-performing companies, slightly more than 4% of the total, account for all of the net wealth creation. That is, the remaining 96% of companies whose common stock has appeared in the CRSP data collectively generate lifetime dollar gains that matched gains on one-month Treasury bills.”

The market’s impressive returns over time are the result of a very small number of stocks that do exceedingly well. And the vast majority — 96%, according to Bessembinder — of individual stock returns range from mediocre to terrible. Investors who expect the typical stock to meet or exceed the returns of a broad market index are likely to be disappointed.

The implications of these findings clearly suggest investors should pursue one of two strategies 1) try to be a really, really good stock picker (i.e. consistently pick the needle in the haystack), or 2) commit to consistent full market exposure through a broad equity market strategy (i.e. buy the haystack!)

[1] Facebook, Amazon, Apple, Netflix, and Alphabet (Google)