Stocks & Equities

Concentration in the Stock Market

Posted by Ben Carlson - A Wealth of Common Sense

on Friday, 13 July 2018 07:34

CNBC had a piece this week that looked at how top heavy returns in the stock market have been this year. They showed 3 stocks — Amazon, Netflix and Microsoft — alone make up more than 70% of the gains in the S&P 500 and Nasdaq 100 indexes:


When you include Apple, Google (I refuse to call this company Alphabet), and Facebook those numbers jump to an absurdly high 98% and 105%, respectively.

The obvious takeaway here would seem to be that 2018 market returns (around 5% for the S&P and 14% for the Nasdaq 100) are all being driven by a handful of names. And if that handful of stocks ever come back down to earth, which they’ve been wont to do on occasion, watch out below.

The simplest explanation for these staggering numbers is the fact that this is how market capitalization weighted indexes work. By definition, the largest stocks will have a bigger impact on the returns than the smaller stocks.

For instance, Amazon has added nearly $285 billion in market cap this year alone. This number is insane when you consider Amazon’s entire market cap was $285 billion in April of 2016. That $285 billion gain this year is the same size as the total combined market cap of the 40 smallest stocks in the S&P 500.

Many of the names in that list of the 40 smallest stocks by market cap have had good returns this year:


  • TripAdvisor +70%
  • Robert Half International +21%
  • Envision Healthcare +29%
  • AES Corp +23%
  • Nordstrom +14%


But those stocks aren’t going to move the needle as much as Amazon or Microsoft or Apple because they don’t carry the same weights as the large tech stocks.

It would also be more concerning that the gains were so concentrated at the top if the S&P 500 was the only thing going up this year. Spoiler alert — it’s not.

Small cap stocks are up around 10% in 2018. Mid caps have risen almost 6%. Micro caps, the smallest stocks in the market, making up a measly 2% of the total, are up more than 13% this year.

Another way of looking at this is the advance-decline line, which is a way to track market breadth by comparing the number of stocks rising with the number of stocks falling. Here’s the latest reading set against the S&P 500:

If there were only a few stocks rising you would see a large divergence between these lines. Instead, we see the advance-decline fairly inline with the stock market. This tells us that there are far more stocks rising than just a few of the biggest names.

It may feel odd to see performance being driven by so few stocks but this is how the stock market generally works over time. The majority of returns come from a handful of names. It’s like this over both short and long time frames.

Data from Hendrik Bessembinder showed that from 1926 to 2015:


  • Less than half of all monthly stock returns in the U.S. are larger than the one-month Treasury bill rates (meaning most stocks don’t outperform cash).
  • Just 42.1% of stocks have a lifetime return greater than T-bill returns while half deliver negative lifetime returns.
  • Over half the wealth created in the stock market came from the 86 top-performing stocks, around 0.33% of the total.


This doesn’t mean other stocks didn’t do well over this period, just that the most wealth was created in the stocks that grew to be the biggest (which seems sort of obvious when you think about it).

It can also be instructive to look at how some of the other biggest names are performing this year:

Yes, tech stocks are the big winners. No, this won’t last forever. But it’s also true that financial or energy stocks at the top of the market won’t be laggards forever either. It’s quite possible that they can offset some of the relative losses when we do finally see a mean reversion in technology.

Here are a few takeaways to wrap things up on this topic:


  • If you’re invested solely in a total market or S&P 500 index fund, then yes, your returns will likely be driven by a handful of stocks. This is simply the way market cap weighting works, for better or worse.
  • If you’re diversified outside of the market cap weighted indexes, that means your returns are going to look different at times. Going lower on the cap-weighted spectrum has been a net positive this year. Last year large caps outperformed micro, small and mid caps. So it goes when diversifying.
  • The concentration of returns in the stock market is one of the most underrated reasons for diversifying your investments. No one knows where the huge gainers will come from each year or over the long run. Diversifying gives you a chance to allow the outlier winners to overshadow the outlier losers.
  • None of this data I’ve presented here means the stock market can’t fall from here. We certainly could see what many would call an overdue correction in tech stocks that brings down the rest of the market with it. Or investors could get spooked by something else which could send micro caps, small caps, mid caps and mega caps all reeling.
  • But the stock market is not currently being driven by just a handful of stocks. In fact, the fact that smaller companies are outperforming this year is a tell-tale sign that this isn’t the case. Whether it lasts or not, this is a full-fledged market rally where every capitalization size is taking part in the gains.


Further Reading:
The Biggest Stocks


Timing & trends

General Electric's Upcoming Big Day

Posted by Daniel Jones

on Thursday, 12 July 2018 11:50


One of the most interesting companies these days has got to be General Electric (NYSE:GE). After falling from grace in the eyes of investors and eventually being removed from the Dow Jones Industrial Average's list of 30 stocks, a spot it has held continuously since 1907, the conglomerate announced plans to undergo a significant restructuring. However, on July 20th of this year, another event is coming to pass: management is slated to report earnings for the second quarter of the company's 2018 fiscal year. Heading into earnings time, there are some items I have identified, especially now that major changes have been announced to how the business will operate in the future, that investors in the business and watchers of the stock should keep a close eye on.... CLICK for the complete article



Steve Madden's Valuation Has Gone A Step Too Far, Wedbush Says In Downgrade

Posted by Brett Hershman

on Thursday, 12 July 2018 11:37


Steve Madden, Ltd. continues to be a leader in the footwear industry — the brand was named Footwear News' company of the year in 2017 — but its valuation is exceeding guidance, according to Wedbush. 

Wedbush analyst Christopher Svezia downgraded Steve Madden from Outperform to Neutral and raised the price target from $51 to $55.

With shares trading at 20 times fiscal 2018 estimates, Svezia said he's moving to the sidelines on Steve Madden due to valuation.... CLICK for the complete article


Gold & Precious Metals

Gold And Silver Struggle As Sentiment Shifts

Posted by Przemyslaw Radomski

on Thursday, 12 July 2018 11:21


In yesterday’s analysis, we discussed how meaningful gold and silver’s pre-market decline was given a relatively small move in the USD Index. The implications were quite bearish for the PM market, especially that we had just seen a target being reached in gold stocks. And because mining stocks had just underperformed gold for the first time in weeks. Yet, before the day was over, the USD, gold and silver had all reversed and erased most of their daily moves. Does it make the outlook bullish again? Is gold still likely to reach $1,300 shortly?

No. The USD Index indeed reversed its course, but the precious metals’ initial reaction shows how vulnerable they are with regard to the rallies in the USD Index. This is not the kind of reaction that one wants to see when keeping a long position. It’s the one that is preferred while holding a short one.

Let’s take a look at the charts for details.... CLICK for the complete article


Stocks & Equities

Explaining The 'Bullish Case For US Stocks' During Trade Wars

Posted by ZeroHedge

on Thursday, 12 July 2018 11:12


Last week’s rally in US stocks may just be the effect of a light volume/holiday week melt up, but the numbers were impressive and set the posts for last week’s action:


  • S&P 500 +1.52% last 5 days
  • Tech sector in S&P: +2.29%
  • Russell 2000: +3.10%
  • S&P Small Cap: +3.31%
  • All of which roundly beat “Rest of world” equities, up only 0.70% (MSCI All Country Ex-US)


Although Friday’s Goldilocks-style Jobs Report played a role, this strong performance stands in notable contradiction to market concerns over global trade disputes. Given these have been brewing for months, they should now be bitter enough to make for a less appetizing US stock market. The tape respectfully disagrees.... CLICK for the complete article


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