Jim Niedelman:
It’s 4 Your Money time with David Nelson, CEO of NelsonCorp Wealth Management. Great to see you, David.
David Nelson:
Thank you, Jim. I appreciate it. You, as well.
Jim Niedelman:
We’re talking to some retirement issues today, retirement plan and retirement savings. We’ve seen stocks have a significant rally from those lows in March. You discussed recently, there could be more going on under the surface than it seems, based on the prices we see in those broad indices. What light can you shed on that?
David Nelson:
So it’s really interesting to see, as far as the economy is falling off a cliff, and yet the stock market has been rallying significantly. So there’s certainly a disconnect that’s taking place there. I know a lot of it’s stemming from what the Fed has done, the Federal Reserve has done, and as far as the politicians had done, but an interesting point, I guess, that I want to make, and I brought along a chart here to kind of illustrate this, what it’s basically showing is it’s looking at the S&P 500, and it’s looking at the median market cap. Market cap’s a fancy way of saying the size of a company.
David Nelson:
And what we see as far as in the chart is that, give or take a couple months ago, that things peaked, the average company was around $25 billion as far as in value. And if we see that blue line come down pretty dramatically, it bottoms out around 15 billion. So that’s the average, as far as of the S&P. Now, what’s interesting is that’s a 40% drop, but what the market actually did, or the S&P 500 index actually did, was a 34% drop. Translation, the biggest companies basically continue their dominance as far as relating to the index. And subsequently they didn’t fall as much as the smaller big companies, if that makes any sense whatsoever.
Jim Niedelman:
What implications of that dynamic should investors be aware of?
David Nelson:
So I think the second chart is going to show people, again, a great visual to try to drive home the point as far as what’s happening with the S&P. This is the most dominant index that exists as far as in the country. And if you look at the vertical yellow lines, on the left hand are the big companies. So this is the Microsofts, et cetera. And they are over a trillion dollars in market cap. And if we go to the far right, that’s the smallest of the S&P 500, keep in mind the S&P 500 are big companies, the average today of which is $8.2 billion, is the red line that we’re trying to illustrate there. In many of those companies, they’re falling short of that number, meaning that there might be some reshuffling that takes place, as far as with the index. You’ve got 30, 40 companies that aren’t meeting the criteria today that basically the index has demanded as far as through the years.
Jim Niedelman:
How can people watching at home use this information to make their investing decisions?
David Nelson:
I think the most important thing is do not fight the Fed and do not fight as far as what’s taken place. What’s taken place is large cap growth is dominating. The big companies are getting bigger. They’ll continue to get bigger as far as if the trends continue like they are. Stay with the big companies out there, and stay with growth as far as in the foreseeable future.
Jim Niedelman:
David Nelson, good advice as usual. If you missed any of this discussion, we have it available for you on ourquadcities.com.