By Sarah Morgan
The S&P 500 index sailed above 1400 today, a level not seen since the downturn. But analysts say the index changed a great deal on its climb back to the milestone — and investors may need to tweak their portfolios accordingly.
Like the Dow’s climb past 13,000 two weeks ago, and the Nasdaq’s hurdle over 3,000, this latest milestone is a sign the stock market has largely recovered its losses since the 2008 crash. Tech stocks provided much of the muscle for the current market rally, which is why the tech-heavy Nasdaq’s 16% gains this year outshined the S&P’s 11% and the Dow’s roughly 8%. The Dow has a much smaller tech-stock weighting than the other indexes (and doesn’t include Apple’s 44% year-to-date gain at all).
Back in 2008, when the S&P 500 last crossed 1400, the index wasn’t quite as tech-heavy as it is today. Tech stocks then made up about 15% of the index, according to data provided by S&P Indices. Today, they’re more than 20%. Pre-recession, the index was more heavily weighted to financials: In 2006, they were 22% of the index. Now, beaten-down financials are just under 15%.
Individual investors should keep an eye on these kinds of changes, says Paul Nolte, the managing director of Dearborn Partners. “The danger is that you wind up concentrated in a couple stocks or an industry,” Nolte says. For example, an investor who holds an S&P 500 index fund should keep in mind that it’s about 20% tech stocks when selecting actively managed funds or individual stocks, to avoid doubling up, he says. Diversifying among sectors is becoming more important again this year, as correlations between stocks have fallen, he says.
To be sure, the S&P 500 is a very broad measure of the U.S. stock market. However, when the index does become highly concentrated in one sector, that’s a sign that sector has been on a tear — and investors should keep in mind that nothing outperforms forever, experts says. For example, in 1999, 29% of the S&P 500 was made up of high-flying tech stocks. Not only did tech stocks fall from those levels, the index hit 1400 in November 2000 — and didn’t see it again until November 2006.