SEARCHING FOR “THE MARKET”

If you’ve ever read or watched Financial News, a practice that typically diminishes with more investing wisdom, you have probably seen a headline or an article referring to “the market” that day (and how up or down it is). Depending on the point they are trying to get across, this usually refers to one of the 3 major indices:

• The S&P 500

• The Dow Jones Industrial Average

• The NASDAQ

Some quick definitions:

• The S&P 500 tracks the stocks of 500 large-cap, publicly traded U.S. companies across a broad range of industries.

• The DJIA includes only 30 large cap (commonly more industrial) companies and is not weighted by market cap.

• The Nasdaq index is an index of equities listed on the Nasdaq exchange which include the world’s foremost technology giants.

While the S&P is the most common benchmark for market performance, today I’d like to argue that post 2007, the benchmark focus for all portfolio managers should really be the Nasdaq.

Thomas Friedman has done a wonderful job of illustrating the unbelievable shift that occurred in 2007, completely overshadowed by the housing collapse of 2008. 2007 saw:

• The First Iphone

• Mainstreaming of Facebook and Twitter

• Big Data and Cloud Computing tipping points

• Kindle

• Android

• IBM Watson

• Dramatic cost reduction in Human Genome Sequencing

• Dramatic cost reduction in Solar Panels

• AirBnB

• Github

In 2007 computing and connectivity got FAST and CHEAP and it has never looked back. Today, there is not a single company which does not rely heavily on technology. From Farmers, to Restaurants, no business can survive without it. For this reason alone, I believe that the Nasdaq should usurp the S&P500 for the title of “The Market”.

Below is the last 20 year comparison between the two, and while there is more volatility in the nasdaq, there is also more growth. This also is inline with a ‘true’ representation of how capital markets actually behave.