It’s been said many times. It’s not a stock market, it’s a market of stocks. In 1889 Edward Jones, Charles Dow and Charles Bergstresser founded The Wall Street Journal. May, 1896, gave birth to the Dow Jones Industrial Average as a stock market and economic indicator. Reflecting the dynamics of a growing nation, the Dow has changed markedly since its creation. At inception it encompassed 12 companies, largely basic material and consumer goods suppliers. As market leaders changed, firms were added, others dropped. In 2018, GE, the last remaining component of the original 12, was removed.

In August, the latest alteration of the index took place, adding, Honeywell and Amgen, while eliminating Exxon Mobile, Pfizer, and Raytheon Technologies. The addition of a .com stock and a split in Apple’s stock reflect the impact of soaring technology related valuations in the face of the COVID-19 shelter-in-place mandates. On August 28, the Dow turned positive for the year, although the average still lagged its “all-time-high” record set in February. Conversely, the Dow’s more heavily tech-weighted cousins set new all-time-highs on Aug. 28.

Wait a minute,” you say, “what about the virus?” Mr. Market tends to look beyond today to tomorrow. Investors are chasing companies that “benefit from work-from-home consumers or are Internet-based, have strong balance sheets, have globally diversified revenue, or are defensive in nature,” says Daniel Needham, president of Morningstar Investment Management. Defensive stocks, he notes, are those whose “demand for their products depends less on the strength of the economy.”

Another force propelling market averages is a shift toward passive investing, buying mutual funds or ETFs that track indexes like the Dow 30, S&P 500, or Nasdaq. But there’s a zinger inherent in index tracking. For example, the S&P 500 encompasses 500 companies. If you buy an ETF that replicates the S&P 500 you don’t own an equal weighting of all 500 stocks. Since the index is “market-capitalization weighted,” the larger soaring valuations of hot stocks means they comprise an ever growing and disproportionate percentage of the index. As of June 30, the Big 5 FAMAG giants — Facebook, Amazon, Microsoft, Apple, Alphabet (Google) — comprised 21.6 percent of the index. This results in intense volatility when investor sentiment sloshes to the downside or upside regarding these holdings.

The Dow with 30 stocks is more limited in scope than the S&P 500, yet it’s followed by the media as a reflection of the broader stock market and the economy generally. The Dow is price-weighted, not cap-weighted like the S&P 500. As investors chase Dow stocks and the darlings de jour rise, hot holdings may disproportionally influence the index.

Apple (APPL) is a case in point. Apple opened 2020 at 296.24, dropped to a 52-week low in late March midst the COVID-19 investor retreat, then soared to a 52-week-high of 515.23 in late August.

The movement of APPL had a significant influence on the recovery of the Dow. But after Apple announced a 4-for-1 stock split, which reduces the price per share, the owners of the Dow index made changes to account for the relative decline in the weight for technology stocks. At a little over $500 per share, Apple was the largest component in the Dow. The split drops Apple to “the middle of the pack” per MarketWatch, roughly around the 18th largest weight in the index. The immediate result is to render the Dow less volatile relative to tech.

Looking beyond the COVID-19 adjustment, should you seek opportunity outside of pure indexes? Perhaps. Some investors worry that higher valuations indicate fewer bargains and a greater likelihood of a market drop with any adverse news. Morningstar’s Needham sees potential based on a valuation calculation over the next 10 years. (“Is the Stock Market Rebound Overdone?”; Morningstar magazine, Q3, 2020). American small-cap value stocks are poised for much higher returns compared to U.S. large-cap growth stocks, he theorizes. Among sectors, he favors energy and financials. Whereas large-cap U.S. growth stocks have set the pace for some time, he sees value stocks as attractive at current prices for the long term.

Is it time for a portfolio reassessment and a change in your long-run equity allocations within your overall risk/reward strategy? Has COVID-19 altered your outlook and timetables relative to major life transitional events, like retirement? Do you need to be more or less aggressive in meeting goals? Investment reallocations should reflect long-term goals. Investments are but a tool. It’s purpose, meaning, responsibility, mission and vision that count. What’s your plan?

Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;  Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of  SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.

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