If I had told you in March of this year that global stock markets would be positive by August, you would have thought I was crazy. At the time, it seemed like the stock market plunge and uncertainty surrounding the global pandemic had no end in sight. However as of September 30th, the global stock market, measured by the MSCI All Country World IMI Index, was positive 0.48% for the year, despite the worst economic contraction we had seen in decades.
Source: Morningstar Direct.
How can this be? There is no doubt that the unprecedented stimulus from the Federal Reserve and Congress have had an impact on stabilizing stock markets contributing to positive performance during the time period since the legislation passed. In addition, another factor that provides context is the structure of most major stock market indexes. Indexes like the MSCI All Country World IMI and the S&P 500 are market cap weighted. This means that the largest companies and sectors, by market cap, have the largest weighting. This also means that they have the largest influence on the index’s performance.
Below are the market characteristics of the global stock market, as captured in the MSCI All Country World IMI index. Due to market cap weighting, the largest companies in the world have the largest weight. For example, Apple, Microsoft, and Amazon make up just under 9% of the entire global stock market! The two largest stock market sectors are Information Technology (20.86%) and Consumer Discretionary (12.96%), which, together, account for roughly one-third of the global stock market.
Source: MSCI
If you look at the year-to-date sector returns below, you will see that the performance has been uneven, and the largest sectors have performed the best this year by a wide margin. The information technology sector, which includes Apple and Microsoft, has benefited from the current environment and is up 29.43%. The consumer discretionary sector, which includes Amazon.com, is up 19.45%. The tremendous returns of these large companies and sectors have driven the performance of the MSCI index.
YTD MSCI ACWI IMI Sector Returns as of 9/30/20, Source: Morningstar Direct
It is also noticeable that not all areas of the stock market are performing well this year. In fact, some are really struggling. The energy sector is down -42.95%, financials are down -22.65%, and real estate is down -18.74%. However, these sectors are relatively small and, therefore, have less of an impact on the index’s overall performance. For example, energy is only 2.77% of the MSCI All Country World IMI Index.
It is important to note that performance can change at any time. The largest companies and sectors can have a disproportionate impact on index performance. Therefore, diversification is important regardless of the economic environment. As this year exemplifies, stock markets have the tendency to do things we would never expect.