If you take the stock market news at face value, you would think that everyone anywhere near the market is getting rich. After all, the big U.S. market indicators such as the Dow Jones industrial average, the Standard & Poor's 500-stock index and the Nasdaq composite index ended the week at new highs or within spitting distance of them. The Internet boom seems to produce billionaires like popcorn. And the market for IPOs--Wall Street-ese for initial public offerings of stock--is as frenzied as ever.
But while the market roars on--the S&P 500, the most important stock index in the country, is showing double-digit gains for an unprecedented fifth straight year--something very strange is happening. Even though virtually all broad-market indicators are up this year, most of them substantially, more U.S. stocks have fallen in price than have risen. Strange, but true. According to Aronson & Partners, a Philadelphia money-management firm, more than half of the S&P 500 stocks are down for the year, even though the index is up a healthy 16 percent (including reinvested dividends). As of our cutoff date, Dec. 8, the S&P had 262 losers and only 238 winners for the year. As best I can tell, the S&P has never had more losers than winners in a year in which it's up by double digits. And it's not as if the S&P is a fluke. The broadest U.S. stock index, the 7,200-stock Wilshire 5000 (don't ask why a "5000" index has more than 7,000 stocks) had 3,874 losers, according to Aronson, compared with only 3,359 stocks that are ahead or breaking even.
How can the overall market be rising so strongly when there are more losing stocks than winners? The answer: technology stocks and market weighting. While not every tech stock has risen, technology stocks as a whole have done so fabulously that they've dragged the broad market up. "We used to talk about tech stocks being part of the market," says Edward Rosenbaum, director of research at Lipper Inc., "but now they are the market."
Now, for market weighting. Except for the Dow, which is an arithmetic average, all the other major indicators are weighted by a company's stock-market value. When you calculate the Dow, a $1 rise in Microsoft's share price counts the same as a $1 rise in Eastman Kodak's. But in the S&P 500, Microsoft's $1 move counts 16 times as much as Kodak's. That's because Microsoft has 5.1 billion shares outstanding and Kodak has only 316 million. So a $1 change in Microsoft moves the S&P 500 by $5.1 billion, but a $1 Kodak change moves it only $316 million. The two biggest stocks in the S&P 500--Microsoft and General Electric--have a combined weight about equal to the 250 bottom stocks. "What you get when you say you're buying the [S&P 500] index is a lot different than if you're buying the individual stocks," says Kevin Johnson, research director at Aronson. If you'd put an equal amount of money into each of the 500 stocks on Jan. 1, you'd have made just about 7 percent through Dec. 8, Johnson says, while the index itself returned about 16 percent.
Technology stocks have risen so far so fast that their S&P clout is growing almost as fast as the number of twentysomething Internet billionaires. The Aronson firm says technology stocks were 29.5 percent of the index's total market value on our cutoff date. That's almost double their weight (15.7 percent) two years ago. One S&P 500 change alone--putting Internet company Yahoo into the 500 on Dec. 7 and tossing out low-tech Laidlaw, a bus-fleet operator--added about 0.6 of a percent to the techs' weight in the index. But most of the increase comes from tech stocks having risen more rapidly than other stocks.
This spring it looked as if value stocks--shares of companies such as Citigroup, AT&T and Alcoa, with lots of assets and profits relative to their market value--were staging a rebound. But that petered out quickly. For example, the growth index of the Russell 2000, which measures small-capitalization stocks, was up 29.5 percent for the year through Dec. 8, while the value index was down 5.2 percent. That 34.7-point gap, huge as it is, is actually smaller than the gap between the Russell mid-cap growth index (up 37.4 percent) and the value index (down 3.4 percent).
This is the second straight year that growth has trounced value to such an extent, Russell says. That helps explain why many longtime market players, who tend to lean to the value side, seem positively obsessed waiting for the tech stock bubble, as they consider it, to burst.
But while lots of tech stocks seem to be priced irrationally--why should Yahoo rise an insane 64 percent in the five trading days between the time it was named to the S&P 500 and the time it actually joined?--you have to be a fool to ignore the fact that technology will increasingly dominate the economy, at least for the next several years. Look. It's taken less than half a dozen years for the Internet to evolve from a techie plaything into a business vehicle that Ford and General Motors plan to use to make a combined $170 billion of annual purchases online. But a lot of Internet stock valuations are based on hopes and dreams rather than realistic business plans, and will likely melt away. The problem with the Internet stocks that are here to stay, such as America Online, is they're priced so high--AOL is worth $200 billion--that it's hard to see how they can ever earn enough money to justify their current share prices. But even if--make that when--Net stocks tank, technology's disproportionate impact on the direction of the market is here to stay. Even if many of the twentysomething billionaires aren't.
Anjali Arora contributed to this column. Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.