INVESTING: Performance of stock indexes hasn’t told whole story

The S&P 500 finally broke out of its seven-month trading range, and there are stories coming out that the bull market is on again. To us, the bull market never left. It all depends on your perspective.

Since the late 1990s, the structural makeup of the major averages has served to mask the underlying action and confuse the average and professional investor alike.

By the spring of 1998, the vast majority of stocks on both the New York Stock Exchange and the NASDAQ markets had topped, and they were aggressively entering bear markets.

You would not have known that simply by looking at the Dow Jones industrial average or the S&P 500 index. The indexes themselves soared to ridiculous heights, despite a large amount of internal erosion.

The reason this took place is because the major averages are capitalization-weighted. This means bigger companies have a larger influence over the movement of the average than smaller ones. Even today, the top 15 companies control 75 percent of the S&P’s movement every day.

By early 2000, it seemed as though our stock market had launched into an entirely new dimension. But it was only a few stocks that were lighting it up each day. There is kind of an opposite effect going on right now, and it might explain why you’re not making any money in the market so far this year.

Most mutual funds and portfolio managers invest with a capitalization-weighted theory, so their performances don’t deviate much from the big indexes.

The small and mid-cap stocks have been on fire since the bull market began in March 2003, and they are having a pretty good year in 2005.

The Dow and the NASDAQ are still down for the year, and the S&P 500 is barely in positive ground. If you have only been looking at the surface, you’ve been missing what is turning out to be a fantastic bull market.

Over the last two weeks, oil prices have been settling down a little, and interest rates are beginning to increase.

Remember, I predicted two weeks ago that interest rates would likely head up awhile. I still believe the rise isn’t anything to get alarmed about yet.

The yield on the 10-year note may even get above 5 percent eventually, but the inflation bears have people worried that rates will climb to 8 percent or 9 percent in the near term.

I don’t see that problem, at least for the next several months. From a personalspending standpoint, though, it is nice to see oil level off. High energy costs will cause some inflation, but our system may be able to handle it unless costs get out of control.