Investors are increasingly asking if we may be headed into a bear market. While the S&P 500 has not fallen 20 percent from its highs, the composition of the index hides the violent selling action for much of the stocks. Ben Gossack, Portfolio Manager, TD Asset Management weighs in.
Investors keep asking if we're heading into an equity bear market. That's when security prices fall 20% or more. But investors may be incorrectly focusing on the S&P 500 index, which is not a good representation of a composite of stocks. With more on this is Ben Gossack. He's a portfolio manager at TD Asset Management. Ben, you brought a chart with you today. Can you explain what it's showing and why it's important?
Great. Thanks for having me, Tony. So we've been also getting a lot of questions given that the market has been pulling back from its highs. So typically, the market will have a few rules of thumb. If the market falls by 10%, that's considered a correction. If we fall by 20% or more, that's considered this bear market. And we've seen the Nasdaq Composite fall 20% and we've seen the Russell 2000 fall about 20%. But to your point, people seem to be holding back from saying it's a bear market because the S&P 500 hasn't fallen by 20%. So we thought it'd be good to actually look underneath the hood of the S&P 500. And so the chart that you're looking at, so that's the index, the S&P 500 in red. As you can see, we hit a new all time high. January 4th, it's about 4,818 and we fall by about 14% in late February to about 4,100. But what you can see is when we break out the numbers. So there's about 505 stocks that make up this index, in the blue you can see that almost half this week, we're down 20% or more. So clearly, there's a lot of turmoil happening below the surface, which would indicate again, that more stocks are down 20% than the broader index.
OK, so given that perspective, what impact of the mega-cap tech stocks have on the overall performance of the index?
Yeah, so I think that's the key question. The technology stocks, as well as other growth stocks, have performed very well over the last couple of years, and they've started to crowd out the other members within the index. So if you just look at the top 10 stocks of the S&P 500, they make up 30% of the entire market and 7 out of 10 are technology related stocks, with only one in insurance and two in health care. More importantly, the biggest stock in the market is Apple. That makes up 7% of the benchmark. So to say, has the S&P 500 fallen by 20%? Is effectively asking, is Apple? Or has Apple fallen by 20%? If you combine that with Google, those two companies are about the same size as the entire financial sector. So definitely when you're looking into the S&P 500 and using this as the gauge as to whether the market has corrected or is in a bear market, it's important to understand that composition matters and these big stocks can hide the effects of issues going on across the market and across sectors.
OK, so given the recent volatility that we've seen in equity markets, what's been your investment strategy for the TD Active Global Enhanced Dividend ETF and the TD Active US Enhanced Dividend ETF?
For us, it's business as usual. So in any given market, we're trying to own very high quality companies. We want them to generate free cash flow and we want that cash flow to grow because they'll typically pay us back in dividends and grow those dividends. What's unique about the two ETFs that you mentioned is that they were built to take a dividend income stream and enhance it using call option and put writing strategies. And so in a market like this where we're dealing with lots of issues and tensions related to a war in Eastern Europe, fears over inflation and how central banks will respond to that, that increases the uncertainty and the path in which stocks travel and hence that allows us to enhance our income further. One example would be our call writing strategy. It's no different than owning a high quality investment property and able to take up rents. And in the case of our put writing strategy, being able to get paid to buy stocks that you like at lower prices. So in this environment, it's concerning to find that your stocks have fallen by 20%. The fact that we have these options streams enhance our total return over time.
So for investors who are concerned about the recent volatility uncertainty in the markets, what should they take away from all this?
I think this is a very headline driven market. So good news, stocks go up. Bad news, stocks go down. You mentioned the volatility in the market. You're seeing levels of 30. And what that means to you on a day to day basis is that the market could be up 2% one day, down 2% the next day. And so that can be very concerning. And again, I think it's very important that you stick to your long term strategy and work with your financial advisor because if you panic and you're out, the market could take off and you're left holding cash and watching it go away. So very important to remain key to your long term strategy and look beyond the headlines that seem to drive this market up and down.
And thank you very much for joining us today.