By definition, the stock market averages generally referenced in the press reflect the aggregate average performance of a particular group of publicly traded equities. To better understand what is going on inside these aggregate indexes, it is instructive to look at some of the component segments of the overall equity markets embedded within the headline-grabbing aggregate indexes.
One of the aggregate indexes tracking the price performance of U.S. stocks is the Russell 3000, a product of Russell Investments. Through the end of February, this index increased by 6.9 percent year to date. The price performance of 3,000 of the largest publicly traded U.S. companies can be observed through this index. Making up this aggregate index of 3,000 companies are two primary groups of companies, which are divided into the categories value and growth.
Value stocks are those with lower-forecast sales growth and lower price-to-book ratios, as compared to the rest of the stocks in the same overall index group. Growth stocks are those companies with higher-forecast sales and price-to-book ratios, as compared to the rest of the stocks in the same index group.
Some of the larger companies currently in the growth index are Apple, IBM and Microsoft. Some of the larger companies in the value index are Exxon, General Electric and Chevron.
Separate indexes represent the price performance of these two primary groups of companies. Russell’s growth index of these 3,000 companies had year-to-date price performance of 5.8 percent through the end of February. Price performance for this growth index over the past 52 weeks was reported to be 9.7 percent.
The value portion of these 3,000 companies reported an average year-to-date price increase of 8 percent through the end of February. Over the past 52 weeks, the value index had a price increase of 17.6 percent.
While the broad indexes reflect the average performance of stocks, looking into the underlying behavior of different segments of the overall equity universe can be instructive. Only two segments of the overall stock market are mentioned above, growth and value. Many other indexes track a variety of other segments of the overall equity market. Each of these segments reflects a different set of companies with unique price performance expectations.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.