​The S&P 500 Leadership in 2017 is Concentrated

The S&P 500 Leadership in 2017 is Concentrated

Have you subscribed to my podcast yet? If not, you can click the buttons below to subscribe:

​Main Topic: The S&P 500 Leadership in 2017 is Concentrated

The S&P 500 Leadership in 2017 is Concentrated

In talking with a client recently, I mentioned that market leadership in the S&P 500 in 2017 is highly concentrated in a small percentage of the total number of stocks in the S&P 500.

In this episode I discuss some thoughts I have about where the market is, what it means, and what to do about it.

In the book “Reminiscences of a Stock Operator” by Edwin Lefevre, which is purportedly about the stock speculator Jesse Livermore who operated in the early 1900’s, Lefevre quotes his subject as saying:

“A market does not culminate in one grand blaze of glory. Neither does it end with a sudden reversal of form. A market can and does often cease to be a bull market long before prices generally begin to break. My long expected warning came to me when I noticed that, one after another, those stocks which had been the leaders of the market reacted several points from the top and – for the first time in many months – did not come back. Their race was evidently run.”

The importance of understanding what is going on the underlying market is important when you have to make a decision about asset allocation. Some value investors say that they care less, but if you have eyeballs, and money in the stock market, you can spend a few minutes understanding market leadership.

An easy way to see market leadership is to get the S&P 500 performance data for any period from the S&P 500 website, and sort it to show what stocks have moved the most in the period you selected.

Are there any trends that you can see? Is the performance concentrated or diversified? To show how we can glean important facts from this exercise, I went to the website Finviz.com and selected an S&P 500 heat map for year to date performance. This type of map give you a visual look at how each of the S&P 500 stocks, sized by and weighted by market cap.

S&P-500-heat-map

The first obvious thing is that there are roughly 9 companies whose market cap’s make up a large percentage of the overall index. These are

Constituent

Symbol

Sector*

Market Cap ($B)

Apple Inc.

AAPL

Information Technology

799

Alphabet Inc A&C

GOOGL

Information Technology

658

Microsoft Corp

MSFT

Information Technology

569

Facebook Inc A

FB

Information Technology

486

Amazon.com Inc

AMZN

Consumer Discretionary

458

Berkshire Hathaway B

BRK.B

Financials

457

Johnson & Johnson

JNJ

Health Care

353

Exxon Mobil Corp

XOM

Energy

346

JP Morgan Chase & Co

JPM

Financials

340

4,446B

By weight, these top nine represent 19% of the total market capitalization of the index.

The larger companies have a market cap in the four hundreds or low five hundreds of billions. The smaller ones on the list are in the three hundreds or the low four hundreds.

The point is, this list is only nine companies out of five hundred, or a little over one percent of companies. These nine companies make up 19% of the overall market capitalization.

Conclusion – as they go, so goes the market overall, at least at the full index level.

Now let’s look at the performance of these ten stocks year to date in 2017

Constituent

Symbol

Sector*

2017 YTD Return

Apple Inc.

AAPL

Information Technology

32.8%

Alphabet Inc A&C

GOOGL

Information Technology

22%

Microsoft Corp

MSFT

Information Technology

20%

Facebook Inc A

FB

Information Technology

47%

Amazon.com Inc

AMZN

Consumer Discretionary

28%

Berkshire Hathaway B

BRK.B

Financials

13%

Johnson & Johnson

JNJ

Health Care

14%

Exxon Mobil Corp

XOM

Energy

-9%

JP Morgan Chase & Co

JPM

Financials

12%

From this data, it’s clear that of the top nine companies, only the top five have really outperformed the index average year to date which is around 12%.

Regarding Netflix, it is in the S&P 500 index, but is not large enough by market capitalization to make this list. So much for the N in FAANG. Of course, removing the N would lead to an in appropriate acronym.

So, of the top nine companies, only the top five have really exceeded the combined index, which is what we define as market leadership that matters. All but one of those five are Information Technology, although you could argue that Amazon deserves to be considered IT as well.

Of the top nine, all but Amazon have been producing earnings per share. This means to me that valuations are not based PURELY on speculation, although many of these companies have a speculative component to their current valuations when compared to intrinsic value.

So, although we are once again led by technology, there IS underlying financial performance there, which makes this bull market different from the internet bubble in 2000, for example.

Looking underneath the surface of the index, we see significant turmoil. Companies like Amazon have been cannibalizing retail sales and causing other retail stocks to correct or entire bear territory. Oil and gas stocks have been in bear markets for years now. In the heat map, you can see many patches of black and red indicating little to no movement in all of 2017.

To put it simply, the balloon may be growing at the top, but air is being let out at the bottom.

On the other hand, so many index ETFs and funds have ownership of these top five, I would be concerned about what will happen when these stocks stop rising. If all large funds and ETFs start to sell, there may be a buyer / seller imbalance that could lead to sharp drops.

As a stock picker, it’s tough to compete against a market driven by five huge companies. Most fund managers will have by now capitulated and added them to their holdings, driving even further demand. This reminds me of the same sort of market phenomon that drove the “Nifty 50” in the 1960’s and 1970’s to such extreme valuations until the bear market in the 1970’s.

You might consider this if you hold index funds. Look at their underlying holdings to see how exposed they are to these names.

Disclosures: We are long JPM and JNJ.

​Ask JB: Why do interest rates affect the stock market so much?

: Why do interest rates affect the stock market so much? (self.investing)

submitted 6 hours ago by Azerty800

I understand that if interest rates go up, the risk-free rate will be higher so it means that you would get a greater return for a no risk investment but what does this have to do with the price of the stock market?

Do businesses earn more when interest rates are low?

JB Says: This well understood market truth is actually not a truth, it’s a myth. See the book “The Only Three Questions That Count” by Ken Fisher that does an excellent job explaining how the relationship between interest rates and stock prices is actually a myth. In essence, a simple graph showing the rate fluctuations against the S&P 500 shows a correlation coefficient of less than one (no strong correlation). One explanation for this is that there are plenty of companies that benefit from rising rates like insurance companies and banks. The strengths of these companies somewhat offsets the weak companies that will have problems paying back rising interest debt.

Rising interest rate will also convince some companies to lower their overall debt, improving earnings per share, which adds further earnings to the market.

Ask JB: What is the difference between book value and net current assets value? (self.investing)

submitted 10 hours ago by stha_ashesh

In table 15-2, Graham talks about stocks selling below net assets value. I got confused on this topic while reading 'the intelligent investor' and when I looked up, I could not find clear difference.

Thanks.

JB Says: Ben Graham was talking about companies selling below the value of their working capital minus their debt, and ignoring property , plan and equipment. Net working capital is current assets minus current liabilities. Then subtract long term debt and calculate the remainder per share.

Do you have a burning question on investing you would like answered? Click the button below to send it to me and I will answer it on the podcast!

​Activist Investor Action Alert: Starboard Value Influences $TYPE

http://www.barrons.com/articles/activist-starboard-value-squares-up-its-position-in-monotype-1507956935

Thoughts on this podcast? Disagree with me on some point? Something I missed? Leave a comment!

About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

Leave a Reply 0 comments

Leave a Reply: