JP Morgan wrote yesterday that the dominance of the biggest 10 stocks is drawing similarities with the dot-com bubble, raising the risk of a selloff.
The share of the top ten stocks in the MSCI USA Index’s capitalization [the largest 609 companies representing about 85% of the entire market capitalization], including all the so-called Magnificent Seven, has risen to 29.3% by the end of December. The Bank writes that this is moderately below the historical peak of 33.2% which occurred in June 2000. Furthermore, only four sectors are represented in the top 10, compared with the historical median of six, with the caveat that several companies could be perhaps “mis classified.,” inferring the concentration is even greater.
Some have dismissed the parallels between the current environment and the speculative frenzy surrounding the internet stocks at the turn of century, JP Morgan states “the circumstances are far more similar than one may think.”
Perhaps most significant is that the top 10 stocks command a higher valuation premium relative to the rest of the MSCI USA index when compared to the height of the dot-com bubble.
Stating the obvious, an extremely concentrated market creates a significant risk to the equity markets for just as a very limited number of stocks were responsible for most of the gains, drawdowns in the top 10 could significantly pull the indices down.
The question at hand if a drawdown does occur, how will it affect the 591 other MSCI USA Index companies? JP Morgan infers there could be an extended era when the typical stock greatly outperforms the indices given the dearth of owners.
Trading yesterday was relatively quiet and bifurcated ahead of the release of GOOG and MSFT’s earnings. The NASDAQ declined about 0.75% as short-dated Treasuries rose nominally in yield as US job openings unexpectedly rose in December to the highest level in three months, thus indicating the labor market is still very strong. The data also indicated that fewer workers quit their jobs, perhaps indicating some caution towards the labor market. The Dow rose about 0.35%.
After the close two of the “Magnificent Seven” released results. MSFT sales topped estimates, but cloud growth disappoints some who had lofty expectations sending shares nominally lower. GOOG missed advertising revenues, sending shares down about 6.5%.
Today is also the conclusion of a two-day FOMC meeting. No change in monetary policy is expected. There is a sharp disconnect between what the market thinks the Fed is going to do and what the Fed says it is going to do.
The market is suggesting a 60% chance the Fed will ease in March. Will the Fed reiterate its well-known stance that it does not expect to lower rates until the June/July time period?
If the market suddenly adopts the Fed’s view of monetary policy volatility may considerably rise, perhaps amplified by the interpretation of profit reports.
Last night the foreign markets were up. London was up 0.08%, Paris up 0.17% and Frankfurt up 0.01%. China was down 1.48%, Japan up 0.61% and Hang Seng down 1.39%.
