S&P 500 NOW MORE CONCENTRATED IN THE TOP 5 THAN EVER
A common Wall Street saying is that “the soldiers die first, then the officers, and finally the generals”; meaning that as a market rolls over the first to falter are the smaller companies, then the mid to large companies, and finally the mega cap stocks that sometimes can almost single handedly prop up the overall market.
Investors crowding into a few names is, according to some people, classic late cycle activity.
Currently the generals (Microsoft, Apple, Amazon, Alphabet [Google], and Facebook) comprise +20% of the S&P 500’s total market cap. This concentration is far higher than in the dot.com bubble of 2000 and dramatically higher than in 2009.
So how does this transfer into how we look at stocks broadly?
Looking at the Wilshire 5000 Index (chart courtesy of www.stockcharts.com), which represents the broad U.S. stock market (far broader than the Dow Jones Industrial Index or the S&P 500), we can see that the ‘stock market’ is in a bear trend (where the current price is below the red dashed line, representing the one year average in prices or the long term trend) and -16.1% from its’ peak in February. Here the top five are +20%, or 1/5th, of the value of the index.
Looking at the chart of the Value Line Geometric Index, where each of the 5 mega cap stocks is treated equally to all of the other stocks in the index. Here, instead of the aforementioned companies being 1/5th of the index, they are 5/1,700th or one 1/340th of the index. Each company is treated equally, without the skew created by market capitalization.
Rather than ‘the market’ being down -16% it is instead down -32%, which is double. So things are actually much worse, broadly, if we look at all publicly traded companies equally.
In my humble opinion, pay close attention if your investment portfolio is crowded into these mega cap names because their valuations are high (I will break that down tomorrow).
I wish you the best.
LPL 1-05003888
DEFINITIONS
S&P 500 Index: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ). The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global. The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market.
Value Line Geometric Index: The Value Line Composite Index is a stock index containing approximately 1,675 companies from the NYSE, American Stock Exchange, Nasdaq, Toronto and over-the-counter markets. The Value Line Composite Index has two forms: The Value Line Geometric Composite Index (the original equally weighted index) and the Value Line Arithmetic Composite Index (an index which mirrors changes if a portfolio held equal amounts of stock.)
Wilshire 5000 Index: The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all US-stocks actively traded in the United States. The index is intended to measure the performance of most publicly traded companies headquartered in the United States.
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