During the month of June, the Inflation Protection portfolio produced a total return of -4.1%, which reversed much of the prior month’s 4.5% gain. This compares to a total return of the S&P 500 Index of approximately 3.6%. Individual position returns across the portfolio ranged from -15% for Floor & Decor (FND) to 5% for Costco (COST).
While the S&P 500 had a strong month, it was overwhelmingly driven by large cap technology shares, as momentum around the AI theme strengthened. Meanwhile, several areas of the market which feature prominently in the Inflation Protection portfolio saw pressure in June, such as commodities and materials. The gold price was generally flat, with gold ending the month at just over $2,300 an ounce.
We tend to use the S&P 500 Index as a reference point for interpreting month to month performance. It is the most prominent U.S. stock market index and is very widely owned through passive funds. But a month like June 2024 highlights a number of important considerations associated with using the S&P 500 as a performance benchmark, especially over short time frames.
The S&P 500 Index is market capitalization weighted, like most major market indices (with the price weighted Dow Jones Industrial Average being a very antiquated exception). This means that the more valuable a company is, the higher its weight within the index.
The theory behind market capitalization weighted indices is that they reflect the allocation of all investors to the relevant investment universe. The point is to mimic the positioning of the average investor.
Winner-take-all
Over time, the S&P 500 Index has become increasingly concentrated in a handful of “mega cap” stocks, the vast majority of which are technology stocks or at least technology-related. There are many potential explanations for this, but one that we find quite compelling is the thesis laid out over 25 years ago in a well-received business book called The Gorilla Game by Geoffrey A. Moore.
Moore describes what he calls the “tornado theory.” A “tornado” is a “compressed period of hypergrowth” that “creates a unique set of marketplace dynamics that frequently will catapult a single company into a position of overwhelmingly dominant competitive advantage,” which then allows the company to “generate exceptional returns to its investors for an unusually extended period.”
Over the past several decades, a handful of technology-related stocks have become immensely valuable (arguably because of this “winner-take-all” tendency within the technology space). These stocks now have disproportionate representation within the S&P 500 Index and often dominate its returns.
Investors have given various names to these market bellwethers. “FAANGs” was popular for a while, but then Facebook changed its name to Meta, Google officially became Alphabet and Netflix subsided in importance. Today, “Magnificent Seven” is most commonly used.
