Apple's Outsized Influence On Stock Indices

Mark Hulbert MarketWatch February 14, 2012

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Feb. 14, 2012, 12:01 a.m. EST

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” No, I am not referring to Jeremy Lin.

I am referring to how much Apple /quotes/zigman/68270/quotes/nls/aapl AAPL +1.86% has come to dominate the stock market. Over the last decade, the company's stock has risen nearly 4,000%, or nearly 45% per year on an annualized basis. In 2011 it was the single biggest contributor to both the S&P 500 /quotes/zigman/3870025 SPX +0.68% and the Nasdaq Composite Index /quotes/zigman/123127 COMP +0.95% .

In recent weeks, in fact, the stock's rise has become nearly parabolic. Some have begun to refer to Wall Street as an "NBA Market" "” as in "nothing but Apple."

/quotes/zigman/68270/quotes/nls/aapl AAPL 502.60, +9.18, +1.86% /quotes/zigman/3870025 SPX 1,351.77, +9.13, +0.68%

Furthermore, because Apple's weight in some of the major indices is so large (15% of the Nasdaq 100 Index /quotes/zigman/123472 NDX +0.87% , according to Ned Davis Research), an adviser who missed Apple's boat had to have been exceptionally good at picking stocks in order to have a fighting chance of just matching those benchmarks.

By the same token, a manager who was not particularly good at picking individual stocks could have nevertheless beaten a buy-and-hold if he had been fortunate enough to have invested in Apple.

Consider those portfolios on the Hulbert Financial Digest's monitored list that owned Apple stock in 2002. There were eight of them, as it turned out. Believe it or not, seven of those eight beat a buy-and-hold since then, which is a far higher proportion than the 20% that is normally seen over 10-year periods.

Though Apple's outsized influence on the market indices has been dramatic, it is not unique. Because almost all of the major market indices are cap-weighted, the largest-cap stocks have a much bigger impact on the overall index's performance than the smallest-cap ones. Because of this, an adviser who does one thing well and many poorly can end up outperforming another adviser who does many things well and just one poorly.

Contrast Apple with Titanium Metals /quotes/zigman/319468/quotes/nls/tie TIE +1.07% , which Howard Silverblatt of S&P informs me has an index-weighted market cap of $1.2 billion, the smallest of any in the S&P 500. Imagine a day in which this company's stock price doubles, Apple's stock drops $1.50 per share (or 0.3%), and the other 498 stocks in the index are unchanged.

Believe it or not, the S&P 500 index would show a loss for that day, since Apple's 0.3% loss would have led the company's market cap to fall by more than Titanium Metals' market cap would have increased through its doubling.

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Apple hits out at Samsung Electronics' flagship smartphone, escalating the sprawling legal battle between the two top sellers of the popular devices.

Another classic example of the anomalies of cap-weighted indexes dates back to the 1990s in the international stock arena.

At the beginning of that decade, Japanese stocks were at the height of what turned out to be that country's bubble "” and its stock market represented more than 40% of the combined market cap of the world's equities outside the U.S.

Most international equity managers did not allocate that high of a proportion of their portfolios to Japan, and as a result most of them ended up beating the cap-weighted benchmarks "” such as, for example, MSCI's Europe Australia and Far-East Index, or EAFE.

Regardless of the theoretical arguments for and against cap-weighting, Apple's lopsided dominance of the market poses particular challenges to us when we interpret the returns of an adviser who was fortunate enough to have bet on Apple. How generalizable is an adviser's ability to have identified Apple as a great long-term bet? To the extent Apple is a unique case, how much confidence should we have in the future market-beating potential of an adviser whose superior record was due in all or large part to investing in Apple?

Similar questions could be asked about those managers who refused in the late 1990s to allocate nearly half of their global ex-U.S. equity portfolios to Japan.

Otto von Bismark once famously said that if you like sausage or legislation, you shouldn't look too closely into how they're made. This discussion may incline you to add stock market indexes to this list.

Click here to learn more about the Hulbert Financial Digest.

/quotes/zigman/68270/quotes/nls/aapl Add AAPL to portfolio AAPL Apple Inc. $ 502.60 +9.18 +1.86% Volume: 18.47M Feb. 13, 2012 4:00p var embeddedchart2053059580Chart = new EmbeddedChart('#embeddedchart2053059580', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:AAPL'); jQuery.data($('#embeddedchart2053059580').get(0), 'embeddedchart', embeddedchart2053059580Chart); /quotes/zigman/3870025 Add SPX to portfolio SPX S&P 500 Index 1,351.77 +9.13 +0.68% Volume: 509.39M Feb. 13, 2012 4:33p var embeddedchart124732823Chart = new EmbeddedChart('#embeddedchart124732823', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:SPX'); jQuery.data($('#embeddedchart124732823').get(0), 'embeddedchart', embeddedchart124732823Chart); /quotes/zigman/123127 Add COMP to portfolio COMP NASDAQ Composite Index 2,931.39 +27.51 +0.95% Volume: 0.00 Feb. 13, 2012 5:30p var embeddedchart1186512883Chart = new EmbeddedChart('#embeddedchart1186512883', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:COMP'); jQuery.data($('#embeddedchart1186512883').get(0), 'embeddedchart', embeddedchart1186512883Chart); /quotes/zigman/123472 Add NDX to portfolio NDX NASDAQ 100 Index (NASDAQ Calculation) 2,569.49 +22.17 +0.87% Volume: 0.00 Feb. 13, 2012 5:30p var embeddedchart1132175400Chart = new EmbeddedChart('#embeddedchart1132175400', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:NDX'); jQuery.data($('#embeddedchart1132175400').get(0), 'embeddedchart', embeddedchart1132175400Chart); /quotes/zigman/319468/quotes/nls/tie Add TIE to portfolio TIE Titanium Metals Corp. $ 15.05 +0.16 +1.07% Volume: 1.04M Feb. 13, 2012 4:03p var embeddedchart1085120912Chart = new EmbeddedChart('#embeddedchart1085120912', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:TIE'); jQuery.data($('#embeddedchart1085120912').get(0), 'embeddedchart', embeddedchart1085120912Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse

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By the same token, a manager who was not particularly good at picking individual stocks could have nevertheless beaten a buy-and-hold if he had been fortunate enough to have invested in Apple.

Apple hits out at Samsung Electronics' flagship smartphone, escalating the sprawling legal battle between the two top sellers of the popular devices.

Another classic example of the anomalies of cap-weighted indexes dates back to the 1990s in the international stock arena.

Similar questions could be asked about those managers who refused in the late 1990s to allocate nearly half of their global ex-U.S. equity portfolios to Japan.

Click here to learn more about the Hulbert Financial Digest.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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