[NOTE: The Piton Investment Team did not meet today, in recognition of Good Friday. The team continues to monitor events (and prepare for the upcoming Live Client Connector with Piton clients). For the blog, they offer this insight into a regular component of their discussions. A regular entry will drop next Friday! Have a blessed Easter weekend, everyone!]
The Piton Investment Team constantly checks on multiple perspectives on the performance of the stock market. Clients’ portfolios will be different based on the amount of money that they have invested, revenue needs, risk tolerance, and other factors, so no single index of stocks will correspond exactly to an individual client’s portfolio performance. As professionals, the team compares portfolios against appropriate benchmarks, but they also consult different types of indexes to get multiple perspectives on changes and trends.
For example, the team checks the changes in the S&P 500, but this widely reported index is the cap-weighted version. A“cap weighted” (capitalization-weighted) index is a stock market index where components are weighted based on the total market value of their outstanding shares. An “equal weight” version of the same index (in the S&P 500, each company equals 0.2% of the total) could report a different figure, because changes in the value of stocks of especially large companies could change the total of the cap-weighted index, but not so much in the equal weight version. Neither version is correct or better than the other, but consulting both versions can help discern where there are concerns or opportunities. When changes in the value of larger companies shape changes in the index as a whole, the equal weight version of the index can give an initial sense of whether the change is representative of more stocks in the index or not. This is why the team reviews both versions of the index every week, in case one or both together suggest a trend that could affect the performance of clients’ portfolios. This can also be true of economic sectors represented within the index ( here you can find some data about how the two versions of the index have differed historically). In fact, the team is reviewing some historical trends in sector performance ahead of client events next month, so the team will be back with more next week!
The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index comprised of the common stocks of 500 leading companies in leading industries of the U.S. economy. You cannot invest directly in an index.