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He S&P 500 has long been the gold standard for stock market returns. This blue-chip index, which tracks the performance of the 500 largest publicly traded companies in the U.S., has returned just over 10% on average since its inception in 1957.
However, over the past 10 years, the annualized return has been slightly higher (around 12%). With dividends reinvested, it has been up over 13%! That's an incredible, inflation-busting return!
This good run of form is not guaranteed to continue. But if it were and the index returned 12%, then an investment of £1,000 today would become £29,959 after 30 years (discounting platform fees and currency fluctuations). That's because of the incredible power of compounding.
So, should you invest a thousand dollars in the index this month?
Echoes of the past?
My concern here is that the S&P 500 is up 20% this year and, at 5,751 points, is close to an all-time high. This has been driven by stocks like the artificial intelligence (ai) chip maker. NVIDIA (up to 154%).
While I wouldn't bet on it reaching 6,000 before 2025, the index's P/E ratio is now approaching 30, which is well above its historical average. I am concerned about this very high valuation.
On top of this, I just read that the S&P 500 is having its best year since 1997. In hindsight, we know what was lurking around the corner shortly after: a huge tech market crash!
Could the same thing happen with the ai stocks that have driven the market higher? We don't know, but it makes me reluctant to invest a lump sum in the index at this time.
As Mark Twain (supposedly) said: “History does not repeat itself, but it does rhyme..” This can certainly be true in the stock market.
FOMO Fund Management
According to the Financial times, USB Analysts estimate that Nvidia alone accounts for 1.43% of the 2.1% year-to-date underperformance of active fund managers focused on U.S. large-cap companies. In other words, those who don't own shares of the chipmaker have had a difficult time keeping up with the performance of the S&P 500 this year.
The nice thing about being a long-term individual stock picker is that I can be patient. I'm not obligated to chase rallies in the S&P 500 or popular stocks.
Unloved little fry
So this month I will continue to look for UK small cap stocks. Unlike the S&P 500, these market cap minnows are still very much out of favor.
One action I'm considering adding to is Windward (LSE: WNWD). It is a small software company that operates an ai-powered platform that uses predictive analytics to manage offshore risks.
The stock is down 23% in the last month, which I imagine is related to where the company is based (Israel). Obviously, the broader Middle East conflict presents risks.
However, taking a step back, this situation is also creating huge headaches for shipping companies, especially in key waterways such as the Red Sea and the Gulf of Oman. Windward's focus on maritime intelligence and risk management, including tools to monitor war risk zones, appears more relevant today than ever.
In the first half, revenue increased 37% year-on-year to $17.6 million, with new commercial contracts won and losses reduced. Its blue-chip clients already include PA, Shelland Interpol. At 124p, I think the stock could outperform the S&P 500.
