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A new ‘concern’ for some investors has been the skew of returns in an index. According to some commentators, including fund managers who should know better, the small number of stocks providing the majority of the return for the overall index is a worrying sign, and could lead to a renewed sell-off.
This is, to put it nicely, nonsense. It is merely the latest scare story in a market dominated by such ‘reasons to worry’. Before this reason came along, it was ‘quantitative easing (QE) is driving stock markets higher’ (it isn’t), or ‘buybacks are pushing equities higher’ (they aren’t, the majority of the appreciation in the S&P 500 comes from earnings, around 90%), and so on.
For most indices, and for most rallies, skewed returns are the norm, not the exception. An index is an average of all the stocks in that basket. Some will do better, and some worse. If you survey drivers, most people claim that their driving is above average. But that is statistically impossible. By definition, most stocks must be below average.
The chart below shows the skew for the S&P 500 over the past 20 years: