Afraid Of The Dark? Why The S&P 500 Is Not A True Measure Of Stock Market Strength

  • The S&P 500 has gained 6.73% over the last 30 years whereas the average investor saw a return of 3.6%.
  • 37% of Americans are more afraid of investing (more than the 14% that are of the dark).
  • Creating a reliable index will encourage more investors to enter and stay in the stock market.

For the past 10 years, we have been on a tremendous bull run (until the past few days). For the past 10 years, there has been talk about when another correction will occur (with yells that it’s starting now). For the past 10 years, the 54% of Americans that are actually in the market should have seen their wealth increase more than 300% since the market bottomed out in 2009.

But are all stocks benefiting from this Bull Run? Does a rising tide really lift all waves? And has that 300% wealth increase come to fruition?

Those Who Aren’t Invested At All: The 46% and Growing

46% of Americans are not invested in the stock market, and haven’t seen any capital gains from this movement upwards. Even better, 48% have no idea that the market has increased at all – and 18% thought it went down over the past three years. Almost have of Americans are completely separated from any wealth creation that has occurred. Their wealth stays stagnant when the market increases, but they feel the pain when the market decreases due to the overall contraction in the economy.

There was a tweet that went viral, coming from an individual who wasn’t invested in the market, but budgeted her finances. She talks about the increase in the cost of groceries, as well as the cost of gas and ends with “How about you ask me how the economy is doing?”


Source: Twitter

Most people fall into this group, gauging wealth by how much they have to spend after they buy necessities, and measure economic strength by the price of core products. A stronger market tends to mean a stronger economy, but the stagnant wages, tuition and healthcare bubbles, and the lack of savings among the average American in this “Bull Run” era equates to something else entirely.

The average American, across all income classes except the $100k+, have been investing 10% less than they did, on average, over the course of 2001 to 2008. As we continue to watch this trajectory, there are a couple of things we must consider, assuming a similar pattern in declines.


Source: Gallup

  1. 15% of those with less than $30k in income will be invested
  2. 41% of those with between $30k and $74.9k will be invested
  3. 65% of those between $75k and $99.9k will be invested
  4. 90% of those with more than $100k will be invested

Below is a visual representation of what that contraction in investment will look like across the less than 20-year time span. Middle and lower middle class investors are seeing the largest declines in investing habits, whereas upper class investors are actually investing more.


Source: Author

Those Invested in the Wrong Things: The Unfortunate Allocators

There’s also another group that gets the short end of the investment stick: the people who are invested, but they are invested in stocks like GE (down 47.3% YTD), Ford (down 36.9%), or Kraft Foods (down 35.9%). There is a broad population of the more risk-averse investors who didn’t invest in the high-growth tech stocks.

The more “core” stocks haven’t seen much gain over the past several years. In fact, as many know all too well, GE has completely destructed in terms of value. Sears, Macy’s, and other retailers are following a similar path. There are several key stocks that are boosting up the market, and if one has the capital to afford the $2,000 AMZN stock, (or honestly even the $200 AAPL stock), they are able to follow the gains. But with the median savings account balance at $5,200, not a lot of people can take advantage of the outperformers.


Source: BEA

The general investment population is much more likely to be invested in the GEs and the Fords than the Apples and the Amazons. There is a wide gap between the performance of individual stocks and that of the indexes.

The Equity Discrepancy

The chart below explains this discrepancy among equities pretty well. Apple, Amazon, Microsoft, and Google are leading the charge. They also make up a lot of the in terms of weight in the S&P 500, thus, they have helped to bolster the S&P 500 to the new highs that we have been seeing.

As of October 1st of 2018, AAPL made up the biggest percentage of the S&P 500, making up 3.95% of the index’s market value. MSFT, AMZN, FB, and BRK.B round out the Top 5. Those stocks make up 13.79% of the S&P 500.

In 2015, the top 5 stocks were AAPL, MSFT, XOM, JNJ, and AMZN – and made up only 10.61% of the total value of the S&P 500. That 3.18% weight difference is a big deal. On average, those 5 stocks make up a much larger portion of the value of the S&P 500, which means that when they do well, the index does well. When they do poorly, the index does poorly. Each dollar movement makes a difference.


Source: Irrelevant Investor

The Top 25 stocks make up 35% of the total value of the S&P 500. The Top 40 make up 43.63% of the total value. That means that remaining ~460 stocks make up 56.37% of the S&P 500, with each stock representing approximately an average of 0.12% of the total value of the index.

Let’s say that the Top 40 stocks are all up by an average of 2% on the day (which is an extremely simplified example). The other 460 stocks are down 2% on the day. The S&P 500 would only be down 0.24% despite the vast majority of stock market (in single stock terms) being down more than 8x than that. It’s great that the Top 40 stocks are up, but does that mean the whole market is really doing that well?


Source: S&P Indices 

Market Inequality

A lot of investors are reading about the market reaching all-time highs, and cross comparing it to the numbers in their own portfolio and seeing a huge discrepancy. Over the last 30 years, the S&P 500 had a return of 6.73%. Over the last 30 years, the average investor saw a return of 3.66%.

That’s a big difference. The average investor who is invested in the market experiences gains, but not to the same caliber as the index. No wonder the number of people invested in the market is declining across the board.

And for those who aren’t invested, they don’t experience the gains at all. Only 20% of millennials are invested in the market. What does that mean for the future of finance?

In a survey released by Credit Donkey, 73% of people feel as though the market is gambling, and 37% of respondents are afraid of investing in the market – more than double the number of respondents who are afraid of the dark.


Source: Credit Donkey


The S&P 500 is not an accurate representation of the overall market. When the average investor is earning half that of the major market index, it cannot be considered a true measurement of stock market strength.

Almost ¾ of Americans think that the stock market is gambling. 80% of millennials are not invested at all. Investing in the market is one of the biggest fears of Americans.

When we look to the future of the investment world, we have to consider these factors. If only 20% of the next generation entering the workforce is invested in the market (versus the 51% of Gen X) that could mean things in the most extreme as a liquidity dry-up or an abandonment of the stock market as a common tool.

If we create indexes that are reliable barometers of the market, encouraging across the board wealth growth and limiting the number of investors that exit because they are discouraged. Underperforming the S&P 500 by 3.07% should not be a persistent investing philosophy.

More than likely, people will shift into investing as they age, but if we can encourage financial education from a young age, that fear will dissipate, and people will begin investing sooner (thus creating wealth sooner). It will help to encourage more sustained economic growth, create softer landing pads during business cycle downturns, and create more transparency.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

One response to “Afraid Of The Dark? Why The S&P 500 Is Not A True Measure Of Stock Market Strength”

  1. Kyla – This is interesting – I didn’t know 3/4 of Americans think investing is gambling which I guess in a way it is – and only 20% of millennials participate?  Think there might be any correlation with student debt for that group? I think your last paragraph sums it nicely – education, education, education – we don’t know what we don’t know.  And – the subject can be overwhelming.  Here’s and cheer’s to you who can help change the trajectory!  🙂   (Found one little misspelling – Almost have of Americans are completely separated from any wealth creation that has occurred LM


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