Overview
S&P 500
The S&P 500, an index tracking the 500 largest U.S. public companies, showed a cumulative return of 40.65% over the five years leading up to October 1, 2022 (rising from 2549.33 to 3585.62). However, the index’s three most prominent components—Apple Inc., Microsoft Corporation, and Amazon.com, Inc.—saw significantly higher returns during that same period. Apple’s stock grew by 255.91%, Microsoft’s by 206.45%, and Amazon’s by 128.38% (Bloomberg, 2022a). This clearly demonstrates that the largest companies within the index experienced a much greater increase in returns than the S&P 500 as a whole.
Dow Jones Industrial Average (DJIA)
It is one of the oldest U.S. stock indices that tracks 30 large, prominent companies, posted a cumulative return of 26.13% over the five years leading up to the analysis (rising from 22773.67 to 28725.51). The three largest components of the index are Apple, Microsoft, and UnitedHealth Group. While the returns for Apple and Microsoft were detailed previously, UnitedHealth Group showed a substantial 154.99% cumulative return over the same period (Bloomberg, 2022b). This comparison clearly shows that the largest component companies achieved significantly higher gains than the DJIA index as a whole.
NASDAQ Composite
The Nasdaq Composite, also known as NASDAQ, is among the three most widely used indices, alongside the S&P 500 and the DJIA. The unique aspect of the NASDAQ is its allocation of larger weights to information technology (IT) companies. As of the time of the assessment, the value is 10575.62, whereas it was 6590.18 five years ago (Bloomberg, 2022c).
Subsequently, the percentage change for the cumulative change is 60.48%. The latter is the cumulative return for NASDAQ over the five-year period. The largest three enterprises in the index are the same as with the S&P 500, which are Apple Inc., Microsoft Corporation, and Amazon.com Inc., with cumulative returns of 255.91%, 206.45%, and 128.38%, respectively (Bloomberg, 2022c). Thus, a similar observation can be made regarding higher returns on larger companies compared to the index.
FTSE 100 Index
The Financial Times Stock Exchange 100 Index, also known as the FTSE 100 Index, is a subsidiary index of the London Stock Exchange, focusing on the top 100 companies in the UK. As of the moment of the analysis, the value is 6893.81, whereas it was 7522.87 five years ago. Hence, the percent change is equal to – 8.36% (Bloomberg, 2022d). The latter is the cumulative return for all the FTSE 100 over the five-year period.
For this particular index, the top three companies are BHP Group, Unilever, and HSBC Holdings. Their cumulative returns are 44.76%, -8.31%, and -36.10%, respectively (Bloomberg, 2022d). Therefore, the index value reflects the general market contraction, where BHP is rather an exception due to its being a mining corporation, making it more resilient to geopolitical shifts.
Swiss Market Index
The Swiss Market Index (SMI), which tracks the 20 largest publicly traded companies in Switzerland, registered a cumulative return of 10.98% over the five years leading up to October 1, 2022 (rising from 9252.12 to 10267.55). The three biggest companies composing the SMI are Nestlé, Roche Holding AG, and Novartis International AG (Bloomberg, 2022e).
In the case of Nestlé, the cumulative return for the company’s stocks over the last five years is 29.17%. For Roche Holding and Novartis International, the values are 30.48% and 1.66%, respectively, over the same period (Bloomberg, 2022a). Therefore, it is evident that the largest companies in the index experienced larger increases in returns compared to the Swiss Market Index as a whole, except Novartis International. The collection of all data presented in the preceding sections is summarized in Table 1 below for easy comparison.
Table 1. Comparison of the Indices
Volatility
Over the last five years, the Nasdaq Composite has been the most volatile. It is stated that “market volatility is defined as a statistical measure of a stock’s (or other asset’s) deviations from a set benchmark or its own average performance” (Rhiannon, 2022, para. 3). NASDAQ is stated to be 122.28% or 8102 volatility value, which is only behind the Russel 2000 index (Rhiannon, 2022). This measurement is substantiated by the fact that the Nasdaq Composite has the highest cumulative returns of 60.48%, which is significantly higher than those of other indices. In other words, the NASDAQ complements its high volatility metrics with higher potential gains.
Another strong indicator of volatility is that the index primarily focuses on IT companies, which narrows its performance to depend on the growth of IT giants and large tech companies. The lack of diversification means that NASDAQ is less resilient to turbulence and market pressures affecting the IT industry. However, any significant improvements provide much larger gains than other, more diversified indices.
The economies have significant fiscal space and monetary transmission potential to cushion the shock of the pandemic and war. As a result, these countries also have a higher public financial capacity, which means that the pandemic’s consequences for health, people’s well-being, and businesses are milder. In developing countries, with their funding gaps and accumulated macroeconomic imbalances, the pandemic’s effects are more pronounced. In particular, the primary indicator of the macroeconomic challenges faced by developing countries is the rise in external debt (Melicher and Norton, 2019). All essential information about the state of the market is immediately reflected in the quotes of the securities.
Price fluctuations in the stock markets occur even without changes in information about the state of the markets, under the influence of other factors. In this situation, investors face the risk of increased volatility in the yield of financial instruments (Melicher and Norton, 2019). Different asset classes respond differently to expectations of higher market interest rates and measures to roll back quantitative easing, leading to a massive reassessment of portfolios of institutional and private investors. There is uncertainty about the impact of central bank tightening on the global economy, as well as increased volatility in financial markets. Multidirectional changes in risk and return parameters of different groups of financial instruments are likely to persist for a relatively long period.
However, although NASDAQ is the most volatile index, the volatility issue impacts all indices due to COVID-19, the war in Ukraine, and global geopolitical tensions. Information signals and price conjuncture in world markets have always been closely related. Against the backdrop of a pandemic and war, there is information unpredictability and an absolute lack of the ability to plan prices and supply volumes.
There is a phenomenon known as information turbulence, characterized by a deteriorating state of financial markets. The dynamism and unpredictability of information signals reach a level at which financial, geopolitical, and macroeconomic risks increase. As a result, volatility in the commodity, stock, and currency markets. Such results can be attributed to the fact that oil is the primary source of energy and is utilized for both industrial and personal purposes, such as refueling cars. Additionally, oil prices are one of the instruments of political influence, which explains the outcome. Natural gas and coal are used primarily for industrial purposes. Under the conditions of lockdown and war, production in many countries has decreased significantly, resulting in a decline in energy demand.
Investment
NASDAQ would have been the best investment if compounded over the last five years. Although the index exhibited a high level of volatility, it generated the largest cumulative returns over the previous five-year period. It is best exemplified by the massive gains of IT companies, which are the largest ones across all major US indices.
Both the S&P 500 and NASDAQ have the same three IT companies as the largest enterprises, but the impact was greater for NASDAQ because it primarily focuses on IT businesses. In other words, the losses or slower growth of other sectors of the American economy did not excessively distribute the net gain for NASDAQ. However, the higher volatility means that losses in the IT sector would have been much more impactful on NASDAQ compared to the S&P 500.
One of the major reasons why NASDAQ shows higher cumulative returns and why IT companies grew so prosperously is that the pandemic had a minimal impact on their performance. While other companies and industries experienced massive disruptions to their operations, supply chains, and revenues, IT services were largely unaffected by lockdown restrictions. For example, many IT products and services require software developers, and many tasks are completed by using computers, which means that the home framework was not a burden for these enterprises. The same cannot be said about restaurants or gyms, which rely on customers physically visiting their businesses and using their services.
However, not only did IT companies demonstrate greater resilience to the pandemic, but they also experienced substantial growth. With the implementation of lockdown restrictions, consumer demand for essential goods and services shifted to an electronic format, such as delivery and online shopping. This meant that the need for IT companies increased even more than before the pandemic, which explains the massive growth of top IT giants and their high deviations from the overall index average. The largest tech corporations were able to maximize their use and capitalize on restrictions since they were not adversely affected by them.
Conclusion
Due to the introduction of restrictive measures and the resulting general panic and instability caused by the virus, Amazon, the world’s largest online store, has become the primary destination for purchasing essential goods. Orders became so high that the company had to spend billions of dollars on improving logistics, which were not prepared for this level of demand. Amazon reported more than $5 billion in profit for Q2 2020, along with sales of $89 billion, representing a 40% year-over-year increase (Bloomberg, 2022c).
Microsoft programs have long been an integral part of the work of almost any company. Microsoft Teams, a multi-user meeting service, has not been very popular; however, its user base has clearly increased after the implementation of measures to prevent the spread of the virus. Much has changed with the introduction of quarantine, as the application has become a means for company employees to stay in touch, and it has also begun to be used for educational purposes. From a little-known product, Teams software has grown into one of the most popular offerings.
Reference List
Bloomberg (2022a) SPX: IND. Web.
Bloomberg (2022b) INDU: IND. Web.
Bloomberg (2022c) CCMP: IND. Web.
Bloomberg (2022d) UKX: IND. Web.
Bloomberg (2022e) SMI: IND. Web.
Melicher, R. W., and Norton, E. A. (2019) Introduction to finance: markets, investments, and financial management. Hoboken: Wiley.
Rhiannon, A. (2022) Volatility measures how dramatically stock prices change, and it can influence when, where, and how you invest. Web.