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Keeping Up With the (Dow) Joneses

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Hi there,

Whether you’ve been investing for a month or a decade, you’ve likely noticed the seemingly endless factors influencing stock prices each day — company earnings, interest rates, the weather, etc. Here are a couple looming over the market this week (and one that is surprisingly not):

  • Investors cheer slowing inflation 📣 — Inflation remains stubbornly high, with April data showing consumer prices rose 4.9% from a year ago. Maybe that doesn’t sound like a reason to cheer, but it’s less than economists had projected and still represents a big slowdown from last summer’s peak of around 9%, so stocks jumped as traders digested the new data.
  • ChatGPT is making 🌊🌊🌊 — Is generative AI the next big tech disruptor? That’s what everyone wants to know, and it’s causing a “stock-market ruckus” as investors evaluate how tools like ChatGPT will impact entire industries, reports The Wall Street Journal. For example, Nvidia, which makes the chips needed to power chatbots, has seen its stock rise 96% so far in 2023. Meanwhile, shares of online education company Chegg went into a tailspin after the company reported a hit to its business from generative AI.
  • Wait-and-see on the debt ceiling crisis ⏳ — The prospect of the federal government defaulting on its debt, which economists predict would be disastrous, doesn’t seem to be spooking the stock market (yet), according to The New York Times. This wait-and-see attitude might change as time trickles by, so we’ll be keeping an eye on how markets react as negotiations in Washington continue.

We know financial news can sometimes sound like the grown-ups in a Peanuts cartoon, so we’ve got more below on how to understand stock market benchmarks. And if you’re looking for some conversation topics for your Mother’s Day brunch, maybe brush up on why it pays to invest like a woman.

News you can use

Graphic of news publication with headline of "News"
  • Companies are putting their money in the future of green energy! United Airlines is on track to triple its use of sustainable aviation fuel. The biofuel could contribute about 65% of the emission cuts required for the airline industry to reach net zero by 2050, but production needs to ramp up from 450 million liters last year to 450 billion liters in 2050. Microsoft signed the first-ever deal to buy nuclear fusion energy to power its data centers. NextEra Energy is talking about investing $20 billion in green hydrogen, according to The Wall Street Journal. Ever see a clean energy concept you don’t recognize? Get the scoop on clean technology.
  • It’s a bird, it’s a plane, it's an electric vertical takeoff and landing aircraft (eVTOL)! The Federal Aviation Administration (FAA) released an airspace blueprint for “air taxis” that gives us the first glimpse of a future with rush hour traffic in the sky. In related news, Joby Aviation will deliver nine air taxis to the US Air Force as part of a contract marking its first opportunity to generate revenue. The FAA also recently granted commercial authorization to the first eVTOL – Guardian Agriculture’s autonomous drone-like crop dusters that promise a more cost-effective and sustainable solution for farming.
  • Mastercard, Medtronic, The Hershey Company, Toyota North America, and Lilly topped the 2023 Top 50 Companies for Diversity list from DiversityInc. The ranking, which is based on survey submissions from employers, looks at leadership accountability, HR metrics like total workforce, management and promotions, talent programs, workplace practices, supplier diversity, and philanthropy.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are a few links to resources and recent stories relevant in these turbulent times:

How is your 401(k) doing really?

Graphic of a green book with graphic of a $100 bill/note on the front – with a bookmark sticking out (that has a checkmark on it)

During the financial crisis, standup comedian John Mulaney used to tell a joke about his attempts to follow the news: “I read that this week over two days, the Dow Jones dropped 929 points, and I can't tell you how frustrating it is to not know what that means! It's getting embarrassing when there's too much financial news. At this point, when I'm watching CNBC, I almost feel like I'm a kid again, and I'm listening to my parents talk about me in front of me, and I don't know what the *bleep* they're saying, but I know that it's going to affect me.”

Phrases like “the Dow Jones is up” and “the S&P 500 is down” will usually come up when you’re tuning in to business news. These benchmark indexes give investors and financial analysts signs of how the market is performing and whether their portfolios are beating it or falling behind. But what is a benchmark, and why do they keep getting mentioned? Read on to learn more.

What are benchmarks in investing?

A benchmark is a standard or point of reference against which things can be compared. In investing, indexes are usually used as benchmarks. These are groups of assets of the same class. They are defined and their performances are calculated by the index providers, like S&P, Dow Jones, MSCI, FTSE-Russell, and Bloomberg. The combined returns of the index constituents are meant to represent the movement of the broader market or a segment of the market they belong to. Of course, indexes aren’t an exact representation of the entire market or a sector since they capture only a fraction of it, but they are still useful tools to evaluate the quality of your investments and your investment strategy.

There are more than three million indexes around the world, but the most-watched ones to track the US stock market are the:

  • S&P 500: It is made up of 500 of the largest publicly traded companies in the US economy. It is a capitalization-weighted index, which means an individual company’s ability to move it is dependent on its size. It is seen by many financial experts as the best proxy or representation for the stock market as a whole.
  • Dow Jones Industrial Average (DJIA): Created in 1896, it’s the second-oldest US index and is considered a barometer for the US economy. It contains just 30 large companies with good reputations and sustained growth, aka the mighty blue chips. It is price-weighted, which means expensive stocks have a greater influence on its movement. Some market analysts believe the Dow isn’t a very accurate representation of the market for these reasons.
  • Nasdaq Composite: It includes the over 3,000 stocks listed and trading on the Nasdaq stock exchange, making it more tech-focused with small, new-growth companies the other indexes lack. Like the S&P 500, it is capitalization-weighted.

Other broad stock benchmarks for large US companies (between $10 billion and $200 billion in market value) are the Russell 1000 and the Dow Jones US Large-Cap Total Stock Market Index. Smaller companies are represented with their own indexes, like the S&P SmallCap 600 Index. Benchmarks exist for most investment asset classes, including bonds, REITs, and even crypto, like the Bloomberg US Aggregate Bond Index, the Bloomberg US Treasury Index, the Dow Jones US Select Real Estate Investment Trust (REIT), and the Bitwise 10 Large-Cap Crypto Index.

Using benchmarks

Indexes and their performances are published online and are accessible to anyone with an internet connection. They are an easy way to understand market trends and measure the success of your portfolio.

Despite being long-term-focused investors, we all sneak looks at our 401(k) or investment account balances from time to time, especially when it feels like the market has more twists and turns or highs and lows than a rollercoaster. But you can put what you’re seeing in perspective by comparing your returns to a suitable benchmark.

The S&P 500 is the most commonly used for this purpose because it covers around 80% of the total stock market’s value, and stocks make up a large chunk of most people’s portfolios or retirement accounts. Financial pros tell us that the average return on a 401(k) investment is typically 5% to 8% per year, but in 2022 the average balance in a 401(k) fell 20.5%, closely reflecting the S&P 500’s 19.4% drop.

If you have a diversified portfolio, experts like the ones at Charles Schwab recommend comparing each individual asset to a suitable benchmark to figure out if it’s up to par and keeping up with the broader market or sector it belongs to.

For instance, value stocks and their funds can be compared to the S&P 500 Value Index or the S&P SmallCap 600 Value index. Investments in international markets should be compared to benchmarks like the MSCI Europe and MSCI EAFE. A tech stock promising growth is more suited for comparison with the Nasdaq composite than the S&P 500 or the Dow. A small-cap stock should be compared to the Russell 2000 or the S&P SmallCap 600, not the exclusively large-cap S&P 500.

If you prefer to invest sustainably and screen for certain industries, you may find ESG indexes a more accurate representation. The S&P 500 ESG Index, which is up 9% this year, excludes companies with low ESG scores and involvement in controversial industries like tobacco, thermal coal, and weapons. You also have ESG versions of other indexes, like the S&P 500 Growth ESG Index and the MSCI USA ESG Screened Index.

Managing fund expectations

When it comes to your investments, financial experts remind us that benchmark indexes can provide valuable perspective and sometimes a reality check. There can be a lot of complexity and storytelling in investing, but benchmarks give you and everyone else the cold, hard facts and clarity about the performance of assets. When you get your monthly or annual statements and compare your returns against that of a benchmark, you not only find out if the balance on your investments went up or down but also whether your results were better, worse, or on par with the market that the benchmark focused on during the same period. For example, if the S&P 500 index went up 7.5% in the first three months of 2023 and your investments increased 10%, you “beat” or outperformed the S&P 500. Since markets fluctuate up and down, these benchmarks can be helpful to check both yourself and your investing strategy and to verify the often-tall claims made by those in the financial industry (not to mention that friend who is always bragging).

When it comes to mutual funds, which are mostly actively managed, benchmarks can play an invaluable role in highlighting both the performance of the funds and the impact of the fees that come with the more active role investment managers play. They can help you understand whether the costs the fund charges to manage your money are justified.

Indexes are also replicated in “passive” investment funds that seek to match their performance, like the Vanguard S&P 500 ETF and Invesco QQQ Trust ETF. If you’re buying these, it’s a good idea to compare their performance to that of the underlying index. The returns won’t be equal because of the fees you’re paying, but they should closely track it.

An index fund provider may also use benchmarks to explain the kind of performance and exposure you can expect, which should help you as you allocate your assets and diversify your portfolio. For example, the Goldman Sachs JUST US Large-Cap Equity ETF tracks the JUST US Large-Cap Diversified Index - developed by our friends at JUST Capital, which offers broad market exposure with a high correlation to both the S&P 500 and the Russell 1000.

At the end of the day, benchmarks can provide much-needed perspective, kind of like the advice you get from your best friend. Now that you know a bit more about benchmarks, we hope that they can stand by your side throughout your investing journey.

Before you go -

How many Fruit Roll-Ups can you fit in your carry-on?

** FWIW team members own shares of Lilly, Mastercard, Microsoft, NextEra, Nvidia, and United Airlines.

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