Overall, 2017 was a great year for the stock market. All of the major indices were up and the U.S. labor market was as strong as it has been in a generation. So far in 2018, many of the economic indicators are still strong, and inflation is still low even though it remains a persistent fear.
The market on the other hand has faced a new era of volatility which is not necessarily a bad thing. The divergence between the strong U.S. economy and the volatility of the U.S. stock market is a major difference between this year and the previous one.
An index is a bundle of stocks that are traded publicly on the stock market. It is a conceptual framework. For example, you can’t buy into an index, yet you can buy into an ETF that mimics the performance of a particular index. It carries significant weight for certain sectors as well as broader American business alike. Indices also provide insight into the success of broader business areas and provide a simple metric for the performance of its component companies.
The two most popular indices are the Dow Jones Industrial Average which is made up of 30 household name companies, historically in the industrial and manufacturing sectors. Dow 30 components include companies like Boeing (BA) and Walmart (WMT). The parenthetical abbreviation following each stock is known as a ticker and can denote any publicly traded company. Similarly, the S&P is an index of diverse companies, made up on 500 component stocks. It is arguably the most important index because it can paint a better picture of business performance in the U.S. due to its larger size and the diversity number of sectors it covers compared to the Dow 30.
There are two other important indices: NASDAQ 100 and the Russell indices. The NASDAQ index tracks non-financial companies, primarily in technology and the software realm. Companies on the NASDAQ include PayPal (PYPL) and Netflix (NFLX).
The Russell indices follow small and mid-cap companies which are companies that have a market capitalization of less than $10 billion. A company’s market capitalization, company shortened to ‘market cap,’ is its number of shares multiplied by its share price; it can otherwise be thought of as a firm’s market value. There are three different Russell indices that track 1000, 2000 and 3000 components, respectively. These niche indices are still highly important and often contain companies with the highest growth potential.
All four of these indices are negative for 2018. This means that each respective index closed with a higher average on December 29, 2017, the last trading session of 2017, than their closing on March 23, 2018. This has baffled many analysts who point to the strong fundamentals of publicly traded companies, as well as strong economic statistics like rising wages and high numbers of capital expenditures (investments in expensive technology and machinery). Optimism remains high in the U.S. economy, though that success could be eluding the markets.