Nasdaq Hidden Underperformance Reveals 2022 Stock Market Possibilities


The Nasdaq Composite recent underperformance looks different. Even though the Nasdaq exchange carries the largest popular stocks, the Nasdaq index has lagged the S&P 500 by more than 3% over the past month (Nov. 17 to Dec. 17).

More concerning is the Nasdaq 100

(biggest stocks) Index. It also trails the S&P 500. Moreover, apply a little math and a hidden underperformance story emerges:

One month’s performance (Nov. 17 to Dec. 17)

  • S&P 500: (1.45)%
  • Nasdaq 100: (3.11)%
  • Nasdaq Composite: (4.72)%

Now, because the Nasdaq 100 market capitalization weighting is 75% of the Nasdaq Composite total, we can solve for the performance of the remaining 25%:

  • Equation: Nasdaq performance = (75% x Nasdaq 100 performance) + (25% of Nasdaq Non-100 performance)
  • So, filling in what we know gives us: -4.72% = (.75 x -3.11%) + (.25 x __)
  • Transposing gives us the answer: [-4.72% – (.75 x 3.11%)] / .25 = -9.57%

Here’s the monthly graph showing how we got to this place…

Okay, raise your hand if you knew the 3000+ Nasdaq stocks not in the Nasdaq 100 fell 10% in one month. (My hand is not in the air.) So, now what? What’s going on? And what does it mean looking ahead to 2022?

The first step: Dig into the Nasdaq non-100 details

My first thought was that year-end tax selling of losing stocks was going gangbusters. However, looking at the month’s performance compared to the year-to-date performance and the declines from 52-week highs showed no correlation. So, scratch that notion.

Next, I looked for pockets of mass underperformance that could reveal fundamental or technical reasons for the large underperformance. However, I found none, but that non-finding did help the search.

Next was an examination of the 3000+ Nasdaq non-100 stocks broken down by sectors. Notice the similarly large performance numbers in the table below. That means whatever the cause, it applies to the entirety of the list. For some reason, the Nasdaq exchange stocks beyond the Nasdaq 100 have become of lesser interest to investors.

The second step: Dig into the Nasdaq 100 underperformance

My thought was that if there was simply a split between the 100 top Nasdaq names and all the rest, the Nasdaq 100 shouldn’t be dragging behind the S&P 500. Sure, there are differences in weightings among sectors and industries, but those didn’t seem an adequate explanation for the past month’s performance differences.

It was at this point that I got the bright idea of separating the Nasdaq 100 into S&P 500 issues and non-S&P 500 ones. Voila! There was the performance separation.

Following that finding, I split the Nasdaq non-100 stocks into those in the S&P 500 and the remainder that were not. Again, the significant differences revealed themselves. This table shows the data:

Also note that the S&P 500 unweighted averages are similar, regardless of the exchange. On the flip side, the non-S&P 500 averages are similarly worse by a significant margin.

The bottom line: It’s the popularity of the index, not the exchange, that matters

As we know, the S&P 500 Index is very popular. After examining the numbers above, the recent comments about “concentration” in popular stocks might be more appropriately directed at popularity of index choice.

As to what this means in 2022… Instead of worrying about non-S&P 500 Nasdaq stocks underperforming, perhaps the concern should be directed at the S&P 500 stocks becoming overly popular (and overpriced) by default. Following, that means that the neglected non-S&P 500 stocks could be source of superior performance next year.


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