2021 stock market return concentrated in the top 5
CONCENTRATED RETURNS IN A HANDFUL OF STOCKS, JUST LIKE 1999?
S&P Global Market Intelligence, www.spglobal.com, compiled the following numbers; for 2021 the NASDAQ has a year to date negative return when removing the largest 5 stocks from the calculation (which includes Apple, Microsoft, NVIDIA, Tesla, and Alphabet (Google)). Said another way all of the return has been in the largest 5 stocks, if you didn’t own those 5 companies your return approaches -25%.
This happened in 1999, where returns were concentrated in a handful of stocks. Those companies later became the posterchildren for what became known as the ‘dot com bubble’. The NASDAQ did not regain 1999 levels until 2014, leaving a wake of devastated retirement accounts in its’ wake.
This is concerning in that when the air started to leak out of the tech bubble the NASDAQ fell roughly -70% over the coming years, destroying the retirement plans for many.
OPPORTUNITIES CAN STILL EXIST
The following chart outlines the three year death march, where the NASDAQ index fell -73.09%, as the air came out of stocks with extremely high valuations.
But some value stocks, such as banks, rose. During that time period the NASDAQ Bank Index was +47.92%. (source: www.stockcharts.com) Past performance is no guarantee of future results, we can though use the experience from 2000 – 2003 as a guide for today.
The broader point is that investors need to be cognizant of the excessive valuations in certain parts of the markets where bubbles can exist and pay attention to other areas that have been overlooked. As the bubble deflates other stocks can benefit.
SAME CONCEPT, DIFFERENT VIEW
We can see the same concept in chart 1, in this third chart comparing price to breadth (breadth tells us how broad the rally is). Here we see that in early 2021 about 80% of stocks were trading above their 200 day moving average (basically current price is above the one year average of prices). This has now fallen to under 40%.
Essentially, fewer and fewer stocks are currently above their price from one year ago. Yet the index has continued to advance, meaning a narrower group of stocks is making up for an ever larger group of stocks posting negative returns. Gains are concentrated in a smaller number of companies. Source: Bloomberg
Here is one example of how extreme some of the valuations within the 5 largest stocks has developed. The market capitalization of some companies has tripled over the past 2 years, far outpacing the company’s revenues and earnings. In my opinion this can be indicative of a speculative bubble.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
LPL 1-05222620
DEFINITIONS
Bloomberg - Bloomberg provides financial software tools and enterprise applications such as analytics and equity trading platform, data services, and news to financial companies and organizations through the Bloomberg Terminal (via its Bloomberg Professional Service), its core revenue-generating product. Bloomberg L.P. also includes a wire service (Bloomberg News), a global television network (Bloomberg Television), websites, radio stations (Bloomberg Radio), subscription-only newsletters, and two magazines: Bloomberg Businessweek and Bloomberg Markets.
NASDAQ Bank Index - The NASDAQ Bank Index contains securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as Banks. They include banks providing a broad range of financial services, including retail banking, loans and money transmissions.
NASDAQ Composite Index - is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities.
S&P Global Market Intelligence - Standard & Poor's (S&P) is a company well known around the world as a creator of financial market indices—widely used as investment benchmarks—a data source, and an issuer of credit ratings for companies and debt obligations. It's perhaps best-known for the popular and often-cited S&P 500 Index. The company's roots date back to the 1860s. Since 2016, with offices in 26 countries, its official corporate name has been S&P Global.
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