Is the market over-concentration a bubble? Cathie Wood points to two key factors
ArkInvest’s recent report pointed out that due to the long-term performance of large technology stocks and their high market capitalization weight, the Nasdaq 100 Index and the S&P 500 Index are looking more and more similar. Many mature companies that were considered pioneers 10 to 40 years ago are no longer at the forefront of innovation.
Due to the high concentration in the Nasdaq 100 Index and the S&P 500 Index, the seven major technology giants (MagSeven) have dominated the recent stock market performance. MagSeven’s weight accounts for 40% and 29% of the Nasdaq 100 Index and the S&P 500 Index, respectively. This is the current situation of over-concentration in the market.
Cathie Wood explained the current historical record of over-concentration in the market with the following table. The following table calculates the market value of the largest market value stocks relative to the 75th percentile stocks, representing the proportion of large stocks in the overall market value. It can be seen that the current market concentration is at a historical high.
The key to getting the market out of a healthy pattern!
Wood pointed out that the most similar situation is 1932! For ease of understanding, we also included the trend of the light orange Dow Jones Industrial Average during that period. It can be seen that after 1932, the Dow Jones Industrial Average slowly emerged from the worst period of the Great Depression, and Wood explained that this was due to the market slowly shifting from large stocks to other stocks, and the rotation of stocks drove the overall stock market upward.
Wood suggested that there is still a chance for the market to move out of a healthy pattern, and more deflation and lower interest rates will start another round of market.
