As the year approaches its final two months, an updated review of asset class performance reveals a distinct market landscape. October's performance was predominantly shaped by the influence of mega-cap companies, which propelled major large-cap exchange-traded funds (ETFs) such as SPY, DIA, and QQQ into positive returns. Conversely, their equal-weighted counterparts and mid-cap investments experienced declines. Sector-wise, Technology (XLK) and Health Care (XLV) emerged as the primary drivers of strength. Looking at the year-to-date figures, prominent domestic large-cap ETFs have shown robust gains of 15-20%, with the Semiconductors ETF (SMH) notably escalating by an impressive 49.9%. However, this strong showing in cap-weighted indices belies a broader market reality, as nearly 44.4% of the stocks within the Russell 1,000 index are currently trading in negative territory for the year.
October's stock market narrative was largely dictated by the outsized performance of mega-cap stocks. These market giants exerted significant upward pressure on heavily weighted indices and their corresponding ETFs, creating a divergence from broader market trends. For instance, the S&P 500 (SPY), Dow Jones Industrial Average (DIA), and Nasdaq 100 (QQQ) all benefited from this concentrated strength, recording positive gains. This trend highlights the increasing concentration of market returns in a select few dominant companies.
In contrast, market segments beyond these mega-caps, such as equal-weighted ETFs and mid-cap stocks, did not fare as well. The equal-weight ETF (RSP), which mitigates the influence of larger companies, actually saw a decline, indicating that a significant portion of the market was not participating in the rally. This suggests a narrow market breadth, where gains are not broadly distributed across all components of the index.
A deeper dive into sector performance reveals that out of the eleven major sectors, more experienced declines than advances during October. Specifically, six sectors ended the month in the red, while only five managed to record gains. The standout performers were the Technology sector, represented by the Technology Select Sector SPDR Fund (XLK), and the Health Care sector, represented by the Health Care Select Sector SPDR Fund (XLV). These sectors demonstrated resilience and strong growth, further contributing to the overall positive performance of the cap-weighted indices.
Despite the notable year-to-date gains in major cap-weighted U.S. indices, with many seeing returns between 15% and 20%, a substantial portion of individual stocks within the broader market have not shared in this success. Data indicates that 44.4% of the stocks comprising the Russell 1,000 index are actually down for the year. This figure underscores a critical point: while headline indices may paint a picture of widespread prosperity, a significant number of companies are struggling, pointing to an uneven recovery and persistent challenges for many market participants.
Overall, the market's performance leading into the final months of the year presents a mixed picture. While mega-cap stocks and specific sectors like Technology and Health Care have delivered impressive returns, contributing to robust gains in major indices, a considerable segment of the market has underperformed. This disparity highlights the importance of analyzing market breadth and considering the performance of individual stocks beyond just the headline index numbers.