The Most Concentrated Market in 40 Years

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Forester
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The Most Concentrated Market in 40 Years

Post by Forester »

I am in the camp that the setup for 2021 is similar to twenty years ago, with EM & small caps likely to attract money.

Article by Lawrence Hamtil https://fortunefinancialadvisors.com/bl ... -40-years/

Back in the summer of 2017, I demonstrated that the weightings of the S&P 500’s top components were roughly in-line with the historical average, despite all the publicity and discussion the megacap stocks were getting. Fast forward to the beginning of 2021, and the story is very different; by just about any measure, the S&P 500 is the most top-heavy it has been in at least a generation.
Image
Another illustration of how the top of the market is distorting things is to compare the respective capitalization shares and earnings shares of each S&P 500 sector. Unlike 2017 when we last visited the topic, there are material disconnects between certain sectors’ capitalization shares and their earnings shares, with technology and consumer discretionary, for example, currently being over-represented relative to their earnings contributions...

...

Of course, none of this is to suggest that these popular growth stocks cannot continue to grow and become an even larger chunk of the market. Yet it seems beyond dispute that the index is now extremely concentrated, and material disconnects are surfacing between the fundamentals (e.g. earnings contributions) of certain segments of the market and their market values. Given all this, one is tempted to wonder if the next decade will be a little kinder to small, mid-, and equal-weight strategies, which have languished, relatively speaking, for years.
Image
Nathan Drake
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Re: The Most Concentrated Market in 40 Years

Post by Nathan Drake »

The Oracle Cathie Wood has spoken. Value is dead and dinosaur industries will be completely wiped out by the coming disruptive tech revolution.

This is the way.
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Re: The Most Concentrated Market in 40 Years

Post by pkcrafter »

Yes, lots of investors on the forum are now loading up with growth funds. This demonstrates just how much behavior is embedded in investing decisions.

Growth is over bought and value will probably take the lead shortly.

http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf

Note that the referenced speech by John Bogle was in 2002, but it is just as relevant today as it was then.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
MinnGuyInvesting
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Re: The Most Concentrated Market in 40 Years

Post by MinnGuyInvesting »

This isn't a surprise.


This is top holdings in VT which holds nearly 9000 stocks, but 13% of the holding is these ten companies.
Rank/holdings
Apple Inc.
Microsoft Corp.
Amazon.com Inc.
Alphabet Inc.
Facebook Inc.
Alibaba Group Holding Ltd.
Berkshire Hathaway Inc.
Taiwan Semiconductor Manufacturing Co. Ltd.
Tesla Inc.
Tencent Holdings Ltd.


This is VTI. These 10 make up 23% of it's fund.

Apple Inc.
Microsoft Corp.
Amazon.com Inc.
Alphabet Inc.
Facebook Inc.
Berkshire Hathaway Inc.
Tesla Inc.
Johnson & Johnson
JPMorgan Chase & Co.
Visa Inc.
Index ETF's 41% |ARK Funds 36% | AAPL 4% | TSLA 3% | GOOGL 1% | AMZN 1% |Other stocks 3% | BTC/ETH 4% | | | | Tracking my porfolio: https://www.bogleheads.org/forum/viewtopic.php?p=5745280#p5745280
kolder
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Re: The Most Concentrated Market in 40 Years

Post by kolder »

Doesn't look too crazy if you go back further in time:

Image
BogleFan510
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Re: The Most Concentrated Market in 40 Years

Post by BogleFan510 »

One could argue (not saying it is true or researched) that with many small, independent businesses possibly failing or weakened due to the pandemic, that there has never been a better time for large, deep pockets companies to scoop up underpriced assets and grow with a competitive advantage. Surely large cap is now the place to invest.

There is always one theory that can support current valuations and another theory that calls them into question. The market aggregates these views and sets a price that is usually rational, given known information. The future is unknown.
Roadhog
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Re: The Most Concentrated Market in 40 Years

Post by Roadhog »

Could some of this effect be due to acquisitions by private equity?
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Re: The Most Concentrated Market in 40 Years

Post by willthrill81 »

Looking at the first chart in the OP, it seems to me that the performance of SCV relative to TSM has probably moved inversely to the S&P 500's concentration (i.e., when the S&P 500 is more highly concentrated, SCV is more likely to outperform TSM, and vice versa). I don't know if that actually happened though and am not in the mood right now to bother testing it.
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

kolder wrote: Tue Jan 12, 2021 12:29 pm Doesn't look too crazy if you go back further in time:

Image
Not sure that 2001 and 1972 were the best times for stock investing...

Or 1929...
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Re: The Most Concentrated Market in 40 Years

Post by kolder »

000 wrote: Tue Jan 12, 2021 1:05 pm
kolder wrote: Tue Jan 12, 2021 12:29 pm Doesn't look too crazy if you go back further in time:

Image
Not sure that 2001 and 1972 were the best times for stock investing...

Or 1929...
Sure let's just ignore all of 1940-1970 then
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Re: The Most Concentrated Market in 40 Years

Post by TheTimeLord »

Forester wrote: Tue Jan 12, 2021 11:25 am I am in the camp that the setup for 2021 is similar to twenty years ago, with EM & small caps likely to attract money.

Article by Lawrence Hamtil https://fortunefinancialadvisors.com/bl ... -40-years/

Back in the summer of 2017, I demonstrated that the weightings of the S&P 500’s top components were roughly in-line with the historical average, despite all the publicity and discussion the megacap stocks were getting. Fast forward to the beginning of 2021, and the story is very different; by just about any measure, the S&P 500 is the most top-heavy it has been in at least a generation.
Image
Another illustration of how the top of the market is distorting things is to compare the respective capitalization shares and earnings shares of each S&P 500 sector. Unlike 2017 when we last visited the topic, there are material disconnects between certain sectors’ capitalization shares and their earnings shares, with technology and consumer discretionary, for example, currently being over-represented relative to their earnings contributions...

...

Of course, none of this is to suggest that these popular growth stocks cannot continue to grow and become an even larger chunk of the market. Yet it seems beyond dispute that the index is now extremely concentrated, and material disconnects are surfacing between the fundamentals (e.g. earnings contributions) of certain segments of the market and their market values. Given all this, one is tempted to wonder if the next decade will be a little kinder to small, mid-, and equal-weight strategies, which have languished, relatively speaking, for years.
Image
viewtopic.php?p=5702707#p5702707
Forester wrote: Fri Jan 01, 2021 6:39 pm Averaged calendar year returns for the last three years of the Dotcom bull run = up 27.66% for 2021;

4795
Last edited by TheTimeLord on Tue Jan 12, 2021 1:15 pm, edited 1 time in total.
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

kolder wrote: Tue Jan 12, 2021 1:09 pm Sure let's just ignore all of 1940-1970 then
The further you go back, the less useful the data is.

But the chart you posted seems to contradict, not support, your claim. The last two times in the last FIFTY years when we were near the current concentration were c. 1972 and c. 2000. And going back further there seems to be an eyeballed relation between concentration of top stocks and bubble about to burst.
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Re: The Most Concentrated Market in 40 Years

Post by HomerJ »

Forester wrote: Tue Jan 12, 2021 11:25 am I am in the camp that the setup for 2021 is similar to twenty years ago, with EM & small caps likely to attract money.

Article by Lawrence Hamtil https://fortunefinancialadvisors.com/bl ... -40-years/

Back in the summer of 2017, I demonstrated that the weightings of the S&P 500’s top components were roughly in-line with the historical average, despite all the publicity and discussion the megacap stocks were getting. Fast forward to the beginning of 2021, and the story is very different; by just about any measure, the S&P 500 is the most top-heavy it has been in at least a generation.
Image

(1) That graph is misleading, since the y-axis doesn't start at 0. The difference between 25% and 20% would look a lot less if the graph went from 0 to 30.

(2) 1980 had a pretty high concentration, as high as 2000, and yet 1980-1990 had some pretty good returns. How do we know that the next ten years from this "high" point is going to be like 2000-2010, and not 1980-1990?

It's all junk. No one knows enough to predict the future. You really should stop trying.
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Re: The Most Concentrated Market in 40 Years

Post by HomerJ »

kolder wrote: Tue Jan 12, 2021 12:29 pm Doesn't look too crazy if you go back further in time:

Image
Wow... nice... a much better graph. Amazing how people can twist data.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: The Most Concentrated Market in 40 Years

Post by scout1 »

000 wrote: Tue Jan 12, 2021 1:12 pm
kolder wrote: Tue Jan 12, 2021 1:09 pm Sure let's just ignore all of 1940-1970 then
The further you go back, the less useful the data is.

But the chart you posted seems to contradict, not support, your claim. The last two times in the last FIFTY years when we were near the current concentration were c. 1972 and c. 2000. And going back further there seems to be an eyeballed relation between concentration of top stocks and bubble about to burst.
Is any of this data actually useful? Maybe i'm not squinting hard enough.
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Re: The Most Concentrated Market in 40 Years

Post by HomerJ »

scout1 wrote: Tue Jan 12, 2021 1:21 pmIs any of this data actually useful?
No. :)
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: The Most Concentrated Market in 40 Years

Post by kolder »

000 wrote: Tue Jan 12, 2021 1:12 pm
kolder wrote: Tue Jan 12, 2021 1:09 pm Sure let's just ignore all of 1940-1970 then
The further you go back, the less useful the data is.

But the chart you posted seems to contradict, not support, your claim. The last two times in the last FIFTY years when we were near the current concentration were c. 1972 and c. 2000. And going back further there seems to be an eyeballed relation between concentration of top stocks and bubble about to burst.
Ah yes the good old "old data isn't useful anymore, so let me cherry pick as far back as I can while still being able to support my claim".

My claim was just that it's not that insane to have a few stocks represent a big portion of the market, and it has happened before in the past.
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

scout1 wrote: Tue Jan 12, 2021 1:21 pm
000 wrote: Tue Jan 12, 2021 1:12 pm
kolder wrote: Tue Jan 12, 2021 1:09 pm Sure let's just ignore all of 1940-1970 then
The further you go back, the less useful the data is.

But the chart you posted seems to contradict, not support, your claim. The last two times in the last FIFTY years when we were near the current concentration were c. 1972 and c. 2000. And going back further there seems to be an eyeballed relation between concentration of top stocks and bubble about to burst.
Is any of this data actually useful? Maybe i'm not squinting hard enough.
I don't know, but I do believe that kolder's chart does not support his claim. The last fifty years are more relevant than the previous fifty and so on.
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

kolder wrote: Tue Jan 12, 2021 1:27 pm
000 wrote: Tue Jan 12, 2021 1:12 pm
kolder wrote: Tue Jan 12, 2021 1:09 pm Sure let's just ignore all of 1940-1970 then
The further you go back, the less useful the data is.

But the chart you posted seems to contradict, not support, your claim. The last two times in the last FIFTY years when we were near the current concentration were c. 1972 and c. 2000. And going back further there seems to be an eyeballed relation between concentration of top stocks and bubble about to burst.
Ah yes the good old "old data isn't useful anymore, so let me cherry pick as far back as I can while still being able to support my claim".

My claim was just that it's not that insane to have a few stocks represent a big portion of the market, and it has happened before in the past.
Sure, and if we go back to the 1600s in the Netherlands, the VOC would probably represent a MAJORITY of the whole market cap. Is it relevant?
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Re: The Most Concentrated Market in 40 Years

Post by kolder »

000 wrote: Tue Jan 12, 2021 1:30 pm Sure, and if we go back to the 1600s in the Netherlands, the VOC would probably represent a MAJORITY of the whole market cap. Is it relevant?
Sure? I would love to see a chart going back to 1600.

How do you draw the line between what is relevant and not relevant though? Why not just look at only the last 5 years? We'd probably all agree that things are different now than they were in 2000, therefore going back further than a few years it is not relevant data.
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Re: The Most Concentrated Market in 40 Years

Post by whodidntante »

Nathan Drake wrote: Tue Jan 12, 2021 11:50 am The Oracle Cathie Wood has spoken. Value is dead and dinosaur industries will be completely wiped out by the coming disruptive tech revolution.

This is the way.
Absolutely correct! I could not have said it better myself, but I will still say things worse so we can all enjoy it. :twisted:

US stocks will continue to grow and grow, forever and ever. This outperformance is assured, of course. But only the big stocks are good so you just go right ahead and cap weight. Small, value, international all doomed to perpetual underperformance. We will ride on Mars with our solar cars summoned with a thought. We will finance the trip by selling our Tesla shares to each other. Old economy is buzzard meat; we got tech.

This is the way.
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Re: The Most Concentrated Market in 40 Years

Post by MindBogler »

kolder wrote: Tue Jan 12, 2021 1:40 pm How do you draw the line between what is relevant and not relevant though? Why not just look at only the last 5 years? We'd probably all agree that things are different now than they were in 2000, therefore going back further than a few years it is not relevant data.
Draw the line wherever it best supports one's position. That's how we argue in 2021. /sarc
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Re: The Most Concentrated Market in 40 Years

Post by z3r0c00l »

HomerJ wrote: Tue Jan 12, 2021 1:21 pm
kolder wrote: Tue Jan 12, 2021 12:29 pm Doesn't look too crazy if you go back further in time:

Image
Wow... nice... a much better graph. Amazing how people can twist data.
Yeah, a better chart just kinda negates the whole thrust of this initial post. What was that one big stock in the 1930s, RCA?
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Re: The Most Concentrated Market in 40 Years

Post by MinnGuyInvesting »

z3r0c00l wrote: Tue Jan 12, 2021 1:52 pm
HomerJ wrote: Tue Jan 12, 2021 1:21 pm
kolder wrote: Tue Jan 12, 2021 12:29 pm Doesn't look too crazy if you go back further in time:

Image
Wow... nice... a much better graph. Amazing how people can twist data.
Yeah, a better chart just kinda negates the whole thrust of this initial post. What was that one big stock in the 1930s, RCA?
Standard Oil maybe?
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Re: The Most Concentrated Market in 40 Years

Post by HomerJ »

000 wrote: Tue Jan 12, 2021 1:28 pm
scout1 wrote: Tue Jan 12, 2021 1:21 pm
000 wrote: Tue Jan 12, 2021 1:12 pm
kolder wrote: Tue Jan 12, 2021 1:09 pm Sure let's just ignore all of 1940-1970 then
The further you go back, the less useful the data is.

But the chart you posted seems to contradict, not support, your claim. The last two times in the last FIFTY years when we were near the current concentration were c. 1972 and c. 2000. And going back further there seems to be an eyeballed relation between concentration of top stocks and bubble about to burst.
Is any of this data actually useful? Maybe i'm not squinting hard enough.
I don't know, but I do believe that kolder's chart does not support his claim. The last fifty years are more relevant than the previous fifty and so on.
Kolder didn't make a claim. He said the OP's claim seemed weak and showed a complete chart with MORE historical data (and with 0 on the y-axis) instead of a skewed smaller chart.

And even if you want to stick with the OP's chart for some reason, how do you explain 1980 then? It was just as high as 2000, and money invested in 1980 quadrupled by 1990. Why are you ignoring the 1980 data point in the OP's graph?

The next ten years could be 1980-1990 or it could be 2000-2010. No one knows. Not me, and certainly not the OP.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

kolder wrote: Tue Jan 12, 2021 1:40 pm
000 wrote: Tue Jan 12, 2021 1:30 pm Sure, and if we go back to the 1600s in the Netherlands, the VOC would probably represent a MAJORITY of the whole market cap. Is it relevant?
Sure? I would love to see a chart going back to 1600.

How do you draw the line between what is relevant and not relevant though? Why not just look at only the last 5 years? We'd probably all agree that things are different now than they were in 2000, therefore going back further than a few years it is not relevant data.
IIRC the VOC was 100% of the market cap of the Amsterdam Stock Exchange at the beginning as the exchange was founded by none other than the VOC itself for people to trade its equity and debenture securities.

I don't draw a binary line between relevant and non relevant. The relevancy exists on a continuum that mostly decreases the further we go back and is occasionally punctuated by major events.
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

HomerJ wrote: Tue Jan 12, 2021 2:01 pm Kolder didn't make a claim. He said the OP's claim seemed weak and showed a complete chart with MORE historical data (and with 0 on the y-axis) instead of a skewed smaller chart.

And even if you want to stick with the OP's chart for some reason, how do you explain 1980 then? It was just as high as 2000, and money invested in 1980 quadrupled by 1990. Why are you ignoring the 1980 data point in the OP's graph?

The next ten years could be 1980-1990 or it could be 2000-2010. No one knows. Not me, and certainly not the OP.
kolder made this claim to which I was responding: "Doesn't look too crazy if you go back further in time".

If I read the chart correctly (not easy), 1980 wasn't as high as 2019, 2001, or 1972 though...
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Re: The Most Concentrated Market in 40 Years

Post by jarjarM »

HomerJ wrote: Tue Jan 12, 2021 2:01 pm
000 wrote: Tue Jan 12, 2021 1:28 pm
scout1 wrote: Tue Jan 12, 2021 1:21 pm
000 wrote: Tue Jan 12, 2021 1:12 pm
kolder wrote: Tue Jan 12, 2021 1:09 pm Sure let's just ignore all of 1940-1970 then
The further you go back, the less useful the data is.

But the chart you posted seems to contradict, not support, your claim. The last two times in the last FIFTY years when we were near the current concentration were c. 1972 and c. 2000. And going back further there seems to be an eyeballed relation between concentration of top stocks and bubble about to burst.
Is any of this data actually useful? Maybe i'm not squinting hard enough.
I don't know, but I do believe that kolder's chart does not support his claim. The last fifty years are more relevant than the previous fifty and so on.
Kolder didn't make a claim. He said the OP's claim seemed weak and showed a complete chart with MORE historical data (and with 0 on the y-axis) instead of a skewed smaller chart.

And even if you want to stick with the OP's chart for some reason, how do you explain 1980 then? It was just as high as 2000, and money invested in 1980 quadrupled by 1990. Why are you ignoring the 1980 data point in the OP's graph?

The next ten years could be 1980-1990 or it could be 2000-2010. No one knows. Not me, and certainly not the OP.
+1, 1980 peak and 1990 mini peak both signaled strong stock return if one is to believe that the OP's chart signals forward looking return. So I'm not sure if we can extract too much info from the charts. I would agree too that Kolder's chart is more interesting chart and useful for studying history of the market.
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Re: The Most Concentrated Market in 40 Years

Post by Scott S »

OP may not have intended to start a "why a concentrated index is no big deal" thread, but that's what he did. Whew! :sharebeer
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Re: The Most Concentrated Market in 40 Years

Post by HomerJ »

000 wrote: Tue Jan 12, 2021 2:45 pm
HomerJ wrote: Tue Jan 12, 2021 2:01 pm Kolder didn't make a claim. He said the OP's claim seemed weak and showed a complete chart with MORE historical data (and with 0 on the y-axis) instead of a skewed smaller chart.

And even if you want to stick with the OP's chart for some reason, how do you explain 1980 then? It was just as high as 2000, and money invested in 1980 quadrupled by 1990. Why are you ignoring the 1980 data point in the OP's graph?

The next ten years could be 1980-1990 or it could be 2000-2010. No one knows. Not me, and certainly not the OP.
kolder made this claim to which I was responding: "Doesn't look too crazy if you go back further in time".

If I read the chart correctly (not easy), 1980 wasn't as high as 2019, 2001, or 1972 though...
Look at the OP's chart. It's VERY clear that 1980 was just as high as 2000.

What's crazy is that someone would use that first chart to try and prove that high concentration is bad. Since 1980 was a very good time to invest.
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Re: The Most Concentrated Market in 40 Years

Post by sandan »

000 wrote: Tue Jan 12, 2021 1:05 pm
Not sure that 2001 and 1972 were the best times for stock investing...

Or 1929...
agreed, both figures show the same thing.

of course the market is going to be more concentrated when the markets were much less liquid and exchanges were done in person. the paradox is that when the markets get liquid rapidly, the concentration increased rapidly.
Last edited by sandan on Tue Jan 12, 2021 2:58 pm, edited 1 time in total.
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

HomerJ wrote: Tue Jan 12, 2021 2:52 pm Look at the OP's chart. It's VERY clear that 1980 was just as high as 2000.

What's crazy is that someone would use that first chart to try and prove anything. Since 1980 was a very good time to invest.
You're right, and I agree that the argument "concentration -> poor returns" is a weak one.

However the chart is still useful in showing the higher than normal (in recent history) concentration risk.
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Re: The Most Concentrated Market in 40 Years

Post by Greenman72 »

I think (based 100% on conjecture and 0% on evidence) that this is the result of a "Bogle Bubble" plus an "ESG Bubble" plus a "COVID bubble".

Basically, ESG investing has become the fad, and those ESG investors are artifically inflating the price of the "non-evil fossil fuel" companies. At the same time, the companies that are enabling "social distancing" (such as Google and Amazon) are flourishing because of the current technology environment. And at the same time, the index investors are having to purchase these already inflated securities at a premium, because...that's what market-weighted index funds do.

As a result, I think (again, based on an extremely nebulous crystal ball) that a shift "down and to the left" on the Morningstar Style Box would probably be a good move. Don't know if I would sell assets to do it, but I'd probably try to redirect future cash flows so I could invest in that direction. (As you can tell, I don't have a very strong conviction on the matter.)
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Re: The Most Concentrated Market in 40 Years

Post by Hector »

Following this forum has made my investing very boring.
Since I started following FTSE Global All Cap Index, I have yet to come across an article/thread which makes me think I want to tinker.
I see nothing to implement based on this thread too.
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Re: The Most Concentrated Market in 40 Years

Post by Beensabu »

Forester wrote: Tue Jan 12, 2021 11:25 am I am in the camp that the setup for 2021 is similar to twenty years ago, with EM & small caps likely to attract money.
Of course, none of this is to suggest that these popular growth stocks cannot continue to grow and become an even larger chunk of the market. Yet it seems beyond dispute that the index is now extremely concentrated, and material disconnects are surfacing between the fundamentals (e.g. earnings contributions) of certain segments of the market and their market values. Given all this, one is tempted to wonder if the next decade will be a little kinder to small, mid-, and equal-weight strategies, which have languished, relatively speaking, for years.
Small and mid-cap have not "languished". They've done better than large-cap if you start at 2000 (or any time in the two decades before that). All have pretty much come out the same since about 2004. You have to pretty much be looking from March 2020 if you want to say that large-cap has "outperformed". That's silly.

It's value that has lagged behind growth, across small, mid, and large (mostly just in the last 4 years or so). And the blended index funds have been right there in the middle, as they should be. What's wrong with the middle? Take the mellow middle road. You're never winning, but you're also never losing, unless everyone is losing.

Actually, that's a pretty good argument for holding large, mid, and small cap blended index funds in equal weights. That'll keep you in the middle. Doesn't seem to make much difference though unless you're heavily tilted US equities. Funny how you've got to commit at least 20% of your portfolio to a particular allocation for it to really matter in the long-term.
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Re: The Most Concentrated Market in 40 Years

Post by CyclingDuo »

Forester wrote: Tue Jan 12, 2021 11:25 amGiven all this, one is tempted to wonder if the next decade will be a little kinder to small, mid-, and equal-weight strategies, which have languished, relatively speaking.
The past 10 years has certainly been one of heavy drinking for the DFA advised crowd for sure. :beer

Big move of catch up has already been going on for the past few months in the small caps as the market broadens out. That's very typical for where we are in the cycle.

It is always good to look at the stunning FCF and profits for the top stocks where money has concentrated. The top 5 "tech" stocks + Netflix (Facebook, Alphabet, Apple, Microsoft, Amazon, Netflix) have more FCF than the bottom 250 in the S&P 500. Any wonder as to why they have attracted so much attention via market cap? Nvidia and Texas Instruments are huge cash cows as well. Heck, there is even an ETF with the ticker symbol COWZ that focuses only on the large cap cash cows (holds the top 100 cash cows).

Top 5 Free Cash Flow "Monsters":

Apple, Verizon, Microsoft, Walmart, Pfizer
https://www.investopedia.com/articles/i ... sftwmt.asp

We all own it all via our index funds - so I say let the cash cows do their thing - whether they are large, mid-cap, or small-cap.

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Re: The Most Concentrated Market in 40 Years

Post by bubbly »

kolder wrote: Tue Jan 12, 2021 1:09 pm
000 wrote: Tue Jan 12, 2021 1:05 pm
kolder wrote: Tue Jan 12, 2021 12:29 pm Doesn't look too crazy if you go back further in time:

Image
Not sure that 2001 and 1972 were the best times for stock investing...

Or 1929...
Sure let's just ignore all of 1940-1970 then
That period of 1940-1970 is an interesting outlier. I would venture to guess that due to WWII crippling almost every other developed world's economy, the US was the only major economy to invest in for that time period. Just a wild guess if I were to hazard a guess explaining that behavior. Not that this is actionable or even provable; just offering my 2c
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Re: The Most Concentrated Market in 40 Years

Post by vineviz »

willthrill81 wrote: Tue Jan 12, 2021 12:57 pm Looking at the first chart in the OP, it seems to me that the performance of SCV relative to TSM has probably moved inversely to the S&P 500's concentration (i.e., when the S&P 500 is more highly concentrated, SCV is more likely to outperform TSM, and vice versa). I don't know if that actually happened though and am not in the mood right now to bother testing it.
I was in the mood.

Image

Since 1979, when the market cap of the top 25 stocks added up to more than about 37% of the total S&P 500 it has NEVER been true that the S&P 500 outperformed small cap value over the next five years.

Right now the top 25 stocks add up to 41% of the S&P 500. This isn't unprecedented, but it's about 2 standard deviations above the mean level of concentration from 1979 to 2020.If the past relationship holds that would suggest an annualized outperformance of about 9% per year for small cap value for the next five years.

Looking at the concentration in the top 10 stocks reveals a similar picture.

Image

Here the level of concentration IS unprecedented: the current concentration of 29% is literally "off the chart" at over 3 standard deviations above the mean.

Two takeaways, IMHO:

1) Investors who are already tilting towards small cap, mid cap, and/or value stocks can take some encouragement that their recent pain may indeed finally pay off.

2) Investors who have been convinced by the the two-fund "you only need the S&P 500" arguments should probably either lower their expectations for future returns or prepare for disappointment.

For the timid, the fact is that just about ANY strategy which reduces the exposure of the portfolio to the top 10 or top 25 stocks in the market is likely to help improve their portfolio's returns and/or reduce their portfolio's volatility.
Mel Lindauer wrote: Sun Apr 20, 2014 9:43 am Looks like the investing world is finally realizing what I started saying back in 1999 about mid-caps. Because of my ongoing posts promoting mid-caps, they became known as "Mel's Unloved Mid-Caps".
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Re: The Most Concentrated Market in 40 Years

Post by willthrill81 »

vineviz wrote: Wed Jan 13, 2021 10:14 am
willthrill81 wrote: Tue Jan 12, 2021 12:57 pm Looking at the first chart in the OP, it seems to me that the performance of SCV relative to TSM has probably moved inversely to the S&P 500's concentration (i.e., when the S&P 500 is more highly concentrated, SCV is more likely to outperform TSM, and vice versa). I don't know if that actually happened though and am not in the mood right now to bother testing it.
I was in the mood.

Image

Since 1979, when the market cap of the top 25 stocks added up to more than about 37% of the total S&P 500 it has NEVER been true that the S&P 500 outperformed small cap value over the next five years.

Right now the top 25 stocks add up to 41% of the S&P 500. This isn't unprecedented, but it's about 2 standard deviations above the mean level of concentration from 1979 to 2020.If the past relationship holds that would suggest an annualized outperformance of about 9% per year for small cap value for the next five years.

Looking at the concentration in the top 10 stocks reveals a similar picture.

Image

Here the level of concentration IS unprecedented: the current concentration of 29% is literally "off the chart" at over 3 standard deviations above the mean.

Two takeaways, IMHO:

1) Investors who are already tilting towards small cap, mid cap, and/or value stocks can take some encouragement that their recent pain may indeed finally pay off.

2) Investors who have been convinced by the the two-fund "you only need the S&P 500" arguments should probably either lower their expectations for future returns or prepare for disappointment.

For the timid, the fact is that just about ANY strategy which reduces the exposure of the portfolio to the top 10 or top 25 stocks in the market is likely to help improve their portfolio's returns and/or reduce their portfolio's volatility.
Mel Lindauer wrote: Sun Apr 20, 2014 9:43 am Looks like the investing world is finally realizing what I started saying back in 1999 about mid-caps. Because of my ongoing posts promoting mid-caps, they became known as "Mel's Unloved Mid-Caps".
Excellent work! Your recommendations for buy-and-hold adherents are sound.

It seems to me that the relationship in the second chart is probably curvilinear.

The totality of the data that I've seen of late makes me believe that the S&P 500 is unlikely to have more than low single-digit positive returns over the next decade and that SCV is likely to dramatically outperform the S&P 500, similar to what we saw from 2000-2009. Those are just my thoughts and are worth every cent of what was paid for them.
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Re: The Most Concentrated Market in 40 Years

Post by firebirdparts »

willthrill81 wrote: Tue Jan 12, 2021 12:57 pm Looking at the first chart in the OP, it seems to me that the performance of SCV relative to TSM has probably moved inversely to the S&P 500's concentration (i.e., when the S&P 500 is more highly concentrated, SCV is more likely to outperform TSM, and vice versa). I don't know if that actually happened though and am not in the mood right now to bother testing it.
That is an astute observation. Thanks vineviz for the charts. Food for thought.
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Re: The Most Concentrated Market in 40 Years

Post by Anon9001 »

firebirdparts wrote: Wed Jan 13, 2021 12:39 pm That is an astute observation. Thanks vineviz for the charts. Food for thought.
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Re: The Most Concentrated Market in 40 Years

Post by willthrill81 »

Anon9001 wrote: Wed Jan 13, 2021 12:49 pm
firebirdparts wrote: Wed Jan 13, 2021 12:39 pm That is an astute observation. Thanks vineviz for the charts. Food for thought.
It is not smart to assume past is equal to future. Just ask the factor investors.
Of course the future never looks just like the past. But it does tend to rhyme, and in some cases, it rhymes very strongly.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: The Most Concentrated Market in 40 Years

Post by dumbmoney »

A slightly odd thing I noticed is that Vanguard Total World is currently more top heavy (13.70% in top 10) than Vanguard Total International (10.30% in top 10). Normally you would expect the reverse since Total World is the more diversified fund.
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Re: The Most Concentrated Market in 40 Years

Post by Slick8503 »

Total world is more top heavy because the US portion is much more concentrated than the ex-us portion.
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

dumbmoney wrote: Wed Jan 13, 2021 2:43 pm A slightly odd thing I noticed is that Vanguard Total World is currently more top heavy (13.70% in top 10) than Vanguard Total International (10.30% in top 10). Normally you would expect the reverse since Total World is the more diversified fund.
Very interesting tidbit.
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Re: The Most Concentrated Market in 40 Years

Post by Greenman72 »

Anon9001 wrote: Wed Jan 13, 2021 12:49 pm
firebirdparts wrote: Wed Jan 13, 2021 12:39 pm That is an astute observation. Thanks vineviz for the charts. Food for thought.
It is not smart to assume past is equal to future. Just ask the factor investors.
On the contrary—I believe that the best indicator of future behavior is past behavior.
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Re: The Most Concentrated Market in 40 Years

Post by JoMoney »

000 wrote: Wed Jan 13, 2021 8:50 pm
dumbmoney wrote: Wed Jan 13, 2021 2:43 pm A slightly odd thing I noticed is that Vanguard Total World is currently more top heavy (13.70% in top 10) than Vanguard Total International (10.30% in top 10). Normally you would expect the reverse since Total World is the more diversified fund.
Very interesting tidbit.
Not really, I would not expect "Total World" to be less top heavy then "Total International", the average market cap of international was and continues to be much smaller than Total US. There hasn't been a time that VT fund had a smaller average market cap then VXUS, let alone in the top 10 stocks.
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Re: The Most Concentrated Market in 40 Years

Post by 000 »

JoMoney wrote: Wed Jan 13, 2021 10:51 pm Not really, I would not expect "Total World" to be less top heavy then "Total International", the average market cap of international was and continues to be much smaller than Total US. There hasn't been a time that VT fund had a smaller average market cap then VXUS, let alone in the top 10 stocks.
It's interesting to me -- regardless of how long it's been the case -- that an ex-US investor who switches to All World increases top 10 concentration.
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Re: The Most Concentrated Market in 40 Years

Post by langlands »

vineviz wrote: Wed Jan 13, 2021 10:14 am
willthrill81 wrote: Tue Jan 12, 2021 12:57 pm Looking at the first chart in the OP, it seems to me that the performance of SCV relative to TSM has probably moved inversely to the S&P 500's concentration (i.e., when the S&P 500 is more highly concentrated, SCV is more likely to outperform TSM, and vice versa). I don't know if that actually happened though and am not in the mood right now to bother testing it.
I was in the mood.

Image

Since 1979, when the market cap of the top 25 stocks added up to more than about 37% of the total S&P 500 it has NEVER been true that the S&P 500 outperformed small cap value over the next five years.

Right now the top 25 stocks add up to 41% of the S&P 500. This isn't unprecedented, but it's about 2 standard deviations above the mean level of concentration from 1979 to 2020.If the past relationship holds that would suggest an annualized outperformance of about 9% per year for small cap value for the next five years.

Looking at the concentration in the top 10 stocks reveals a similar picture.

Image

Here the level of concentration IS unprecedented: the current concentration of 29% is literally "off the chart" at over 3 standard deviations above the mean.

Two takeaways, IMHO:

1) Investors who are already tilting towards small cap, mid cap, and/or value stocks can take some encouragement that their recent pain may indeed finally pay off.

2) Investors who have been convinced by the the two-fund "you only need the S&P 500" arguments should probably either lower their expectations for future returns or prepare for disappointment.

For the timid, the fact is that just about ANY strategy which reduces the exposure of the portfolio to the top 10 or top 25 stocks in the market is likely to help improve their portfolio's returns and/or reduce their portfolio's volatility.
Mel Lindauer wrote: Sun Apr 20, 2014 9:43 am Looks like the investing world is finally realizing what I started saying back in 1999 about mid-caps. Because of my ongoing posts promoting mid-caps, they became known as "Mel's Unloved Mid-Caps".
Hi vineviz, thanks for this. Where did you find these charts? I tried searching for them and couldn't find them. Or did you create them yourself?
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Re: The Most Concentrated Market in 40 Years

Post by Boglegrappler »

It is always good to look at the stunning FCF and profits for the top stocks where money has concentrated. The top 5 "tech" stocks + Netflix (Facebook, Alphabet, Apple, Microsoft, Amazon, Netflix) have more FCF than the bottom 250 in the S&P 500. Any wonder as to why they have attracted so much attention via market cap? Nvidia and Texas Instruments are huge cash cows as well. Heck, there is even an ETF with the ticker symbol COWZ that focuses only on the large cap cash cows (holds the top 100 cash cows).
I'm not a super fan of free cash flow since it can be hard to agree on the definition, but the larger point made here is accurate.

I did some analysis last winter and found that, using 2019 data available, the top 10 weighted companies in the S&P500 accounted for 25% of the net income of the entire index. The top 37 or so companies accounted for fully 50% of the net income of the entire index.

I suppose valuations can become excessive, and the typical reason for that is over-estimating the intermediate to longer term growth prospects. But to become preoccupied with numerical concentration without looking at fundamentals doesn't seem very worthwhile. There are reasons why certain companies are more valuable than others.
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