Since the start of the year, Apple’s share price has vaulted over 70%. Amazon’s has jumped more than 80%. Both Facebook and Microsoft are up over 40%. And, Google’s stock price is up over 20%. Remarkably, this super-charged performance is happening in the midst of a pandemic.
As things stand now, the top 10 largest companies in the much-watched S&P 500 make up just under 30% of the total market value of the index. This level of concentration in the stock market now sits at a modern day record. It deserves investors’ attention and some level of caution.
For the uninitiated, the S&P 500 is simply a published list of the 500 largest publicly traded companies in the US. It was created to represent a fair sampling of the overall stock market. The S&P 500 is the most popular index around and it captures about 80% of the total market value of all US stocks. Literally tens of trillions of dollars are passively invested to just match the returns of the S&P 500 index.
When you buy the entire S&P 500 in your portfolio, it’s important to note that you don’t actually get 500 equally-weighted stocks. In fact, the 500th stock on the list is far, far less important than the 1st stock listed. Rather, it’s a market value-weighted index with the top stock, Apple, representing over 6% and the last stock on the long list makes up just a tiny sliver of your holdings.
Over recent decades, the top 10 largest companies in the S&P 500 represented around 20% of the total market value. Today, the top stocks are pulling ahead like never before. As a result of this imbalance, today’s level of stock market concentration exceeds the tech-bubble era of the late ‘90s.
The froth we’re all seeing in today’s stock market is baffling to many professionals. Politicians have distributed trillions of borrowed dollars into household and corporate bank accounts in recent months. At the same time, the Federal Reserve has shoveled trillions in printed money into our financial markets and set interest rates at zero. They’ve even promised markets that they aren’t even thinking about thinking about raising rates anytime soon!
Interest rates have hit rock-bottom and savers are starved for safe income like never before. Money market funds now yield next-to-nothing, CD rates are downright tiny and high-quality, short-term bonds yield less than inflation. The search for a reasonable, low risk return feels futile.
Investors and speculators have responded by purchasing the safest, largest stocks they can find. Among them are massive, cash-rich and debt-free technology companies and a smattering of companies that are currently benefiting from the shifting demands created by this pandemic. At the same time, investors eschew most companies involved in traditional retail, banking, travel and energy, among other sectors. The gap between the haves and have-nots is widening. This troubling trend is happening on both Wall Street and on Main Street.
Things are getting more than a little bit funny. Seriously.