Gap Between Dow and S&P 500 Set to Widen

Gap Between Dow and S&P 500 Set to Widen

The tech-light Dow has struggled this year to keep pace with the tech-heavy S&P 500’s gains, and Apple’s recent stock split only accentuates the divide. This according  to a recent article in The Wall Street Journal.

While short-term differences between the two indexes is not uncommon, the article notes that they tend to track each other closely over longer periods. But this year’s pandemic has deepened the divide because of how it has exaggerated the divergence between growth and value performance.

“Many tech and communications companies in the S&P 500 are growth stocks,” the article notes, adding, “More staid businesses, such as industrial and financial companies, are often in the value bucket and typically trade at low valuation multiples.” The Dow’s price-weighted structure underscores the difference relative to the S&P 500.

With millions of people now working from home, tech stocks are “among the few reliable bets during a crisis that has upended most other businesses,” the article states. Growth stocks in the S&P 500 have reportedly “soared” by 25% this year versus an 11% dip in value shares.

According to S&P Dow Jones Indices senior analyst Howard Silverblatt, the disconnect between the two indexes is not a major concern. The Dow, he argues, is not meant to imitate the S&P 500, but rather to emulate the top of the U.S. stock market. Tim Courtney, chief investment officer of Exencial Wealth Advisors, weighs in: “Some investors think they’re getting better exposure to the broader economy, and you might want to do that if you feel like market weightings in the other two indexes have gone too far.”