Stocks are trading flat this morning following a better-than-expected rise in jobless claims. The Nasdaq Composite hit another new all-time high, but the S&P and Dow both dropped. Wednesday’s Covid-19 tally pushed the U.S. over the 3 million mark, reminding investors of just how widespread the outbreak has become.
Still, economists are celebrating the fact that only 1.314 million Americans filed for unemployment last week, beating the consensus estimate of 1.39 million. Continuing claims, meanwhile, fell by 698,000 to 18.06 million.
But as usual, Big Tech is doing the heavy lifting. FAANG (plus Microsoft) in particular.
And over the last few months, they’ve managed to gobble-up a massive chunk of the market’s total capitalization. The group of companies, which we’ll call FAANG+M, had been trending in this direction for years.
The post-crash rally merely kicked FAANG+M’s market dominance into high gear.
When the market becomes this reliant on only a few companies, investors start to get nervous. Historically, market cap “clustering” has resulted in serious pain for investors.
In fact, back in the 1960s and early 1970s, the stock market found itself in a similar predicament. The “Nifty 50” – the fifty most popular large-cap stocks at the time – were “must-haves” for investors. Bulls bought equity in these fifty companies without the intention of ever selling, come hell or high water. Eventually, many Nifty 50 stocks hit price-to-earnings (PE) ratios of 100 times or higher, extending the bull market past rational levels.
It all came crashing down in 1973 when the bear market took hold, wiping out scores of retail traders in the process. The Nifty 50 was no more.
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Then, in 1990, Big Tech began absorbing massive portions of market cap as stocks surged. Former Fed Chairman Paul Volcker drew comparisons between the new class of high-flying tech firms and the Nifty 50 in a 1999 presentation on the state of the economy.
“The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings,” Volcker said to an audience of economists, analysts, and reporters.
Of course, nobody heeded Volcker’s warning. Not even Alan Greenspan, the Fed Chairman at the time, who had no clue that the market’s eruption was enabled by his fast-and-loose monetary policy. Minutes from the Federal Open Market Committee’s (FOMC) 1999 meetings confirmed as much.
In 2000, the dot com bubble popped, taking the rest of the market down with it. Buy-happy speculators were crushed epic fashion.
These days, stocks are exhibiting very similar behavior. FAANG+M now controls nearly 20% of the Wilshire 5000 index. Apple and Microsoft are each worth roughly $1.5 trillion. Amazon, nearly $1.4 trillion.
Google parent company Alphabet, which has struggled to boost falling ad revenues, is now worth over $1.0 trillion.
Meanwhile, the rest of the market fights for what amounts to table scraps. Energy stocks have been completely decimated. Most sectors remain in the basement, even after the post-crash rally.
The market’s increased reliance on FAANG+M has put everyone in an extremely precarious spot. These are powerful companies, not only in their capacity to generate revenues, but in their ability to control the general market, too.
A FAANG+M sell-off will likely signal the death of the rally. It may also lead to a bear market continuation. Even after this morning’s better-than-expected unemployment report, stocks are flat.
At some point, bulls will be forced to “give up the ghost” if it becomes apparent that the U.S. economy is recovering slower than expected.
And when that happens, only six stocks will do most of the damage. We could very well be on the wrong side of another major equity bubble, caused by a shocking concentration of market cap and overzealous bulls.
If that’s the case, expect 2020 to be added to the same conversation as 1973 and 2000 – years in which bulls got roasted for their irrational exuberance.