Why an S&P 500 Record Means More for You Than a Dow High

NEW YORK, NY - DECEMBER 11:  Traders work on the floor of the New York Stock Exchange at the end of the day on December 11, 2012 in New York City. With expectations that the Federal Reserve may announce more stimulus measures by the end of the year, the U.S. Stock Market moved higher Tuesday. The Dow Jones industrial average rose 0.6 percent with the the S&P 500 rising 0.65 percent.  (Photo by Spencer Platt/Getty Images)
(Spencer Platt, Getty Images)

Amid all the attention the Dow Jones Industrial Average (^DJI) has gotten with its series of record-setting highs, many investors haven't noticed that the S&P 500 (^GSPC) has also cozied up toward its own high-water mark. If the benchmark closes above 1,565 -- just a few points above where it closed Friday -- it will top the record it set back on Oct. 9, 2007.

With the Dow already in new territory, why should you care about a potential S&P record? For one thing, the S&P 500 represents a much bigger cross-section of the U.S. stock market than the Dow does.

The DJIA only reflects how 30 of the top companies in the world are performing. Often, if the Dow does well when other market measures aren't posting gains, it suggests that smaller companies are facing challenges that the biggest companies are able to overcome, and that disparity can end up causing bigger economic problems down the road.

By contrast, the S&P 500 following the Dow upward to new highs indicates that the entire market -- rather than just leading companies -- is enjoying the fruits of the four-year economic recovery.


But just because the S&P is back near record highs doesn't mean that all 500 stocks have moved in lockstep. Some of the S&P's components have done extremely well, while others have lagged behind and not contributed at all to a record run.

On the bullish side, high-growth companies Netflix (NFLX) and priceline.com (PCLN) have posted the best returns in the S&P 500 since the index's previous record.

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Netflix has jumped more than 725 percent overall, despite a steep plunge during late 2011 and early 2012 that destroyed more than 80 percent of its market cap. The stock recovered as the streaming video provider bounced back from its strategic mistakes, pressed its advantages, and inked a lucrative deal to stream Disney's (DIS) rich library of movies and television shows.

Priceline has advanced more steadily over the past five-and-a-half years, falling during the financial crisis in 2008 but rising ever since. The online travel portal has crushed its competitors -- not just with its innovative name-your-own-price auction format but also through an emphasis on international growth. With an impressive network of deals with hotels around the world, priceline has set up a travel infrastructure that has been hard for competitors to duplicate. Its planned acquisition of Kayak will only give it more ammunition against its rivals.

... And Losers

On the other hand, many S&P 500 stocks never recovered from 2008's bear market plunge. Financial stocks were the biggest victims: AIG (AIG) and E*TRADE Financial (ETFC) both are more than 90 percent off where they stood in late 2007.

AIG has actually bounced back substantially from its 2008-09 lows, but the company suffered huge dilution from all the additional shares it had to issue as part of the government's bailout of the insurer. As a result, long-term investors are still underwater and likely will remain so for years to come.

E*TRADE hasn't been as fortunate as AIG recently, having continued a long slide that initially stemmed from its ill-fated exposure to the mortgage market. The brokerage company also struggled because ordinary investors fled the stock market early in the recession, and their reduced trading activity has serious dented E*TRADE's sales. Combine that with low interest rates that cut into another lucrative source of income for the broker, and you can see why E*TRADE's stock has steadily declined with few pauses over the years and could be poised for even further losses even if the broader S&P 500 keeps rising.

What Should You Do Next?

A new record high for the S&P 500 indicates generally good conditions for the entire stock market. But it shouldn't lead you to change your overall investing strategy.

Investing in both good times and bad is the best way to move steadily toward your financial goals. But it's a good time to check your investments and make sure that you're not taking on more risk than you thought. With stock prices at attractively high levels, if you need to sell off some of your holdings to reduce your risk level, now's the perfect time to do so.

Other than that, though, sit back and enjoy the hoopla over a new S&P record high -- whenever it comes.

Motley Fool contributor Dan Caplinger owns warrants on AIG. The Motley Fool recommends AIG, Netflix, Priceline.com, and Walt Disney. The Motley Fool owns shares of AIG, Netflix, Priceline.com, and Walt Disney, and has options on AIG. Try any of our newsletter services free for 30 days.