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.

 

IMPORTANT DISCLOSURES

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.  Neither Highcroft, Inc., Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security.  This memorandum is being made available for educational purposes only and should not be used for any other purpose.

The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Some of the statements may be regarded as forward-looking statements. Forward-looking statements are, by their nature, subject to uncertainty.  Forward-looking statements may include assumptions relating to future investment and economic scenarios.  When used herein, the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “will”, “would” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect an opinion relating to future events and are not a guarantee of future performance or developments. Reliance on any forward-looking statements involves known and unknown risks and uncertainties. Actual results and events may differ materially from information contained in the forward-looking statements as a result of a number of factors.   Accordingly, you should be prudent with your reliance on any forward-looking information or statements.

Investing involves risks including possible loss of principal.  Past performance does not guarantee future results.  Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing.  Wherever there is the potential for profit there is also the possibility of loss.  No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft, Inc., Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.

Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  The economic forecasts set forth in this material may not develop as predicted.

Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.

The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed and the accuracy and completeness of such information has not been independently verified.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.  Investing in the index would require investors purchase an investment product, which would involve fees and expenses.

The fast price swings in commodities and currencies can result in significant volatility within an investor’s holdings.

 

ABOUT US

Highcroft Investment Advisors provides retirement planning, investment management, financial planning, fiduciary investment management, and lifetime income planning. Certified Financial Planner. Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428). 

Highcroft Investment Advisors serves as a 3(21) and 3(38) Investment Advisor and fiduciary for labor union supplemental 401(k) and pension plans and corporate 401(k) plans.  Highcroft works with the union's counsel, recordkeeper, administrator, and the plan's trustees.  United Association, Plumbers, Pipefitters, Steamfitters, IBEW, and Carpenters.  Serving Wisconsin and Minnesota.  401(k) investment management provided through LPL Financial's corporate RIA - offering 3(21) and 3(38) services.

Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428).As independent financial advisors we are not driven by certain products or services, instead we focus on your needs as an individual.Services include fiduciary fee only, retirement and divorce financial planning, life insurance, capital preservation, lifetime income planning, bonds, stocks, ETF, income, IRA, brokerage, rollover IRAs.Financial advisor near me, financial planner near me, independent planner near me.

Previous
Previous

VALUATION UPDATE 2020 Q2

Next
Next

How Far Do Earnings Typically Fall in Recessions?