It’s common for people to talk about investing in “the market,” but what people mean by that phrase can vary.
In fact, when people talk about “the stock market” being up or down, they’re rarely referring to the actual market where stocks are bought and sold (that would be a stock exchange). Instead, they are referring to stock indexes, or indices.
The most prominent ones in the U.S. are the Dow Jones Industrial Average (the Dow), the S&P 500, and the Nasdaq Composite Index (the Nasdaq). Each has their own trademark characteristics, detailed below. When you look at whether a stock or a portfolio is outperforming or underperforming the market, the market they’re referring to is often one of these indices.
Dow Jones Industrial Average
Just 30 stocks comprise the Dow, making it one of the narrowest indices in terms of scope. Dow companies are chosen carefully to represent their broader industries; they tend to be very large (large cap, in market terms) and are sometimes referred to as “blue chip” in a nod to the index’s industrial history. For instance, Dow companies, like Walmart and Nike, represent retail; Goldman Sachs and JP Morgan represent financials; and so on.
The Dow is the preferred benchmark of major media broadcasts. It’s sometimes used as an indicator for broader economic health, as well.
S&P 500
When talking through market performance with clients, we tend to refer to the S&P 500 since it offers a much broader market view—500 stocks rather than 30.
The S&P 500 is weighted by market cap, meaning the most valuable company (based on its share price) influences the index more heavily. If a huge company, like Apple, sees a big increase in its share price, it can lift the entire value of the index along with it. Moves in smaller S&P 500 companies, like Etsy or Dominoes, will have far less impact on the index overall.
Nasdaq
The Nasdaq Composite Index tracks all of the stocks on the Nasdaq Stock Exchange, the go-to exchange for technology companies. For this reason, the Nasdaq is traditionally thought of as a “tech-heavy” index. However, with technology driving nearly every company nowadays, a more accurate summary might be that the Nasdaq Composite Index doesn’t include financial companies. If there’s a major move in bank stocks, for example, the Nasdaq will be insulated from that.
Because many young companies choose to list their shares on Nasdaq when they make an initial public offering (IPO), the Nasdaq can sometimes be more volatile than other indices.
Other helpful indices
While broad indices track “the market,” there are a number of other indices that track groups of companies or sectors of the economy. For instance, the Russell 1000 tracks companies with smaller market caps, and can help investors understand how smaller businesses are doing. The MSCI Global Index tracks a group of global stocks, offering a snapshot of how world markets are doing. There are also indices to track specific sectors, like the S&P 500 Consumer Discretionary index which tracks retail stocks.
Globalization in the markets
The U.S. exists as part of a global economy, and markets are no different. What happens in other countries, such as geopolitical conflict or natural disaster, can impact U.S. markets.
Foreign companies trade on U.S. exchanges; U.S. companies trade on foreign exchanges; and U.S. companies often work with foreign companies traded on foreign exchanges. At times, big moves in European, Asian, or emerging markets may indicate future moves in U.S. markets and vice versa.
For instance, many large U.S. companies rely on supplies from other countries; a supply chain disruption that occurs overseas and affects local markets there may ultimately affect share prices here.
Focus on goals, not the market
At the end of the day, “the market” is an important tool when it comes to investing and achieving your financial goals. But it’s important to remember that it’s just that: a tool. At Revo Financial, we design financial plans to help you retire comfortably, put your children (or grandchildren) through school, and support the causes you care about—not to keep up with the S&P 500.
If you have questions, please don’t hesitate to reach out.
