Should investors care that the stock market is being carried on the backs of just a handful of stocks? And, should we be worried that those stocks are all in the tech sector? After all, this means that only one sector needs to fall in order for the entire house to collapse.
These are concerns that you don’t hear often enough in the mainstream press and on social media. Sure, you heard people get panicky back in March and April. But after the biggest 100-day gain in stock market history, it’s hard to convince people that there are cracks in the foundation.
With bored people stuck at home, buying up Tesla, Apple, and Amazon shares at home because there’s nothing else to do, there’s a pervasive sentiment that stocks never go down. The 50% rebound from the March 23 stock-market bottom has been fed by these amateur traders, though the primary catalyst has been the U.S. Federal Reserve.
What we have in the United States is a central bank that will do whatever it takes “to sustain the expansion” – that’s the phrase used by Fed Chairman Jerome Powell. In order to achieve this, the Fed is already buying government bonds, corporate bonds, junk-bond ETF’s, and even mortgage-backed securities.
How much longer will it be until the Fed starts buying the same “FAANG” stocks that are propping up the S&P 500? It hasn’t happened yet, but don’t be surprised if that’s the next phase. Until then, retail investors are bidding up shares of these ultra-wealthy companies, which is only making them ultra-wealthier.
Sven Henrich, also known as the Northman Trader, provides some startling statistics that shed light on what’s really shoring up the stock market:
- The top five biggest stocks (according to market capitalization) represent 25% of the S&P 500. That’s the heaviest five-stock concentration since 2000, and we all know what happened to the stock market that year.
- The market cap of just seven stocks is equal to 39% of the U.S. GDP.
- The balance sheet of the U.S. Fed now equals 36% of the U.S. GDP.
- Just Apple stock by itself has added over $1.1 trillion in market capitalization since the March lows.
The following chart illustrates how the wealth is so fully concentrated into a few companies while everyone else is struggling:
This is what we could call a “bad breadth” situation: in a healthy economy, the majority of businesses are supposed to participate in a bull market. In contrast, the current situation suggests that the vast majority of companies are struggling just to break even while a small handful of tech names carry most of the weight.
To break it down by numbers, it’s been reported that from the earlier market high on February 19 to the recent high on August 18, only 38% of stocks in the S&P 500 made gains while the remaining 62% of the stocks posted losses.
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Sure, the consumer staples segment of the economy did fairly well as people stockpiled essential goods during the onset of the pandemic. Thus, we can discern that companies like Walmart and Costco have rebounded quickly, and that’s justifiable.
But that’s nothing compared to the performance of the big tech names. From the beginning of the year to August 20, Apple stock had gained 61%, Amazon stock rallied 78%, and Nvidia (another tech stock) surged more than 80%.
Even typically manic Jim Cramer noted that something’s off kilter: “We have a bizarre situation where some companies are doing very well, but a lot of other companies are getting crushed… When you get down into the weeds of this market, what you see is that there are a lot more losers than there are winners.”
None of this is to suggest that anyone should short-sell FAANG stocks. Rather, it’s just a word of caution that perhaps it’s time to tap the brakes on your tech-stock purchases. In situations like this, what the smart money does is rebalance from expensive stocks into undervalued ones.
Personally, there are metals and mining stocks that I like right now. I also like to buy and hold stocks that yield dividends. Also, social media pundits and the mainstream press haven’t been touting cannabis stocks lately – and that’s my signal to get in.
In these bizarre circumstances, investors should remember the Warren Buffett quote, “The time to get interested is when no one else is.” It’s an old adage that’s now as timely as it’s ever been.
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