I’m as exhausted with narrow market laments — the jeremiads of disgruntled bears citing “extreme concentration” in the course of prophesying the end times — as the next guy.
And yet, I also like a “good” narrow market lament as much as anyone else.
Narrow market warnings are like any other sort of bear fodder: You know you shouldn’t waste your time, but you do anyway. You’re not going to learn anything you didn’t already know, let alone something that might be useful for strategic purposes (whatever that means), but who doesn’t like the taste of eye candy? (“Listen! Do you smell something?”)
Time was, I’d feign surprise, concern and all sorts of associated emotions while highlighting and re-highlighting figures like the one below, from SocGen’s Andrew Lapthorne. That was back when I thought holding an audience hinged on pretending to be constantly worried about an impending stock crash when, in reality, I don’t (and never did) give a single damn. Now, I openly proclaim how little I actually care and guess what? My audience actually likes me better for it. (Just be yourself, kids.)
The chart above really is something, though. Ain’t it? It’s surprising. And concerning. Maybe it presages a crash. Maybe! You don’t know!
In 2021, at the height of what I call the “stimmy” go-go days, the top 10 S&P stocks accounted for around 30% of index market cap. Now, they comprise 40% of the benchmark and “incredibly” (to quote Lapthorne), nearly a third of overall profits.
What exactly does that mean? And is it scary? Nothing, and no. In the grand, cosmic scheme of things. And that’s the lens through which I encourage all of you to view the world and your time alive in it. That clock’s ticking, and you really should use every spare second to ponder matters of existential concern. Exactly nothing to do with the stock market counts as a matter of existential concern.
But, because that exhortation always falls on deaf ears when you’re talking to avaricious primates who’d sooner beat each other over the head with rocks to get hold of scarce bananas than work together to grow enough for everybody, I’ll submit instead that the chart means we’re currently witnessing heretofore unseen concentration risk in the most important risk asset benchmark known to mankind. And unless you think it’s not worrisome when, as Lapthorne pointed out, the de facto number of constituents in an index comprised of 500 companies is down to just 45, then this is very, very scary indeed.
Are you scared? I am. Just not about narrow markets.
It’s scary if you still believe that stocks are, indeed, shares rather than simply something to trade. Shares as a sliver of ownership in profits and cash flows generated by a company.
You can convince me that earnings and cashflows do matter over a longer horizon, but in the shorter term, stocks have become just another something to trade. Really not all that different than gold and crypto which most everyone tries to dismiss because “there’s no way to value them!”
I am worried about the world as well.
Don’t quote me but I recall reading some research, somewhere, for what it is worth, that market concentration does not necessarily lead to a market fall off.