Finimize - ♦️ The S&P 500 got reshuffled

What’s going on here?

The S&P 500 geared up for its quarterly reshuffle, with KKR, CrowdStrike, and GoDaddy as the newest additions to the squad.

What does this mean?

The S&P 500 – the index tracking the 500 biggest US stocks – gets a quarterly makeover to keep up with the pace of the large-cap stock market. This time around, Robert Half, Comerica, and Illumina are getting the boot, in changes that will kick in right before the market opens on June 24th. Now, staying in the big leagues is no easy feat. Firms must meet a high standard of profitability and available shares, as well as having a market cap of at least $18 billion. No wonder the share prices of newcomers KKR, Crowdstrike, and GoDaddy got a pat on the back following the news.

Why should I care?

Zooming out: Holding steady.

The S&P 500 reshuffle brings a lot of admin to the desks of index funds. They invest in all of the companies in a particular index, so the ones tracking the S&P 500 will need to buy new shares to keep up to date. But if you’re an investor in these indexes, the reshuffling shouldn’t affect your portfolio too much. After all, the funds are well diversified, so they’re not massively impacted by a change in a stock price or two.

The bigger picture: Lining the pockets.

Investors will want to keep a close eye on these reshuffles, mainly because the changes in companies’ fortunes can reflect current trends. For example, New York-based KKR’s inclusion highlights the uptick in the private investment sector. CrowdStrike and GoDaddy’s drafting, meanwhile, makes it clear that investors are especially hot on software companies. Mind you, that’s just some of the many tech companies that have been winning investors over lately. US households saw their collective wealth pick up by a record $5.1 trillion last quarter, and nearly three-quarters of that came from the tech-fueled rise in the stock market.

What’s going on here?

“Catastrophe bond” issuance reached a record high in the past five months, as insurers brace for a rough hurricane season.

What does this mean?

Catastrophe bonds (or “cat bonds”) let insurance companies protect themselves in the event of major natural disasters – like hurricanes or earthquakes – by transferring some or all of the risk to investors. So by snapping them up, cat bond investors are essentially betting that a natural disaster won’t happen. If a disaster does happen, investors could lose some or all of their money, as it would be used to cover the costs of damages. If it doesn’t, investors earn an interest rate that’s usually higher than most other types of bonds. And now that forecasters are expecting a particularly rough hurricane season, insurers are rushing to cat bonds to protect themselves. Case in point: 38% more were issued in the first five months of 2024 compared to the same period last year, hitting a record $11.7 billion.

Why should I care?

For markets: Selling like hotcakes.

Despite troubling weather forecasts, investors have been snapping up the new supply, and you can see why. Cat bonds were up 20% last year, trouncing the 6% return from a standard bond benchmark that’s made up of government and corporate debt. What’s more, cat bonds offer diversification benefits as their performance doesn’t go hand-in-hand with traditional assets. After all, they’re driven by hurricanes and earthquakes rather than market rallies and crashes.

The bigger picture: Risky business.

Still, investors could lose big if a catastrophic event occurs – and that seems to be more and more likely these days. Climate change means weather disasters are becoming more common, and insurance losses have been creeping up, especially as there’s been a run of these events hitting built-up areas. That hasn’t been helped by inflation increasing the cost of repair damages either.