As U.S. stocks continue to hit new highs this year, investors cannot help but worry about the risk of a bubble. Cathie Wood, CEO of Ark Invest, believes that the pursuit of cash and safety in today’s stock market is as strong as during the Great Depression of the 1930s. But when fear dissipates, markets will expand and reward risk-taking again.

The market is overly concentrated in the Big Seven

Ark Invest recently reported that the Nasdaq 100 and S&P 500 are looking increasingly similar due to the long-term outperformance and higher market capitalization weighting of large-cap technology stocks. Many established companies that were considered trailblazers 10 to 40 years ago are no longer at the forefront of innovation today.

The Mag Seven have dominated recent stock market performance due to their high concentration in the Nasdaq 100 and S&P 500. Mag Seven's weightings represent 40% and 29% of the Nasdaq 100 and S&P 500, respectively. This is the current situation of over-concentration in the market.

Cathie Wood uses the following table to explain the current historical record of over-concentration in the market. The following table calculates the market value of the largest stocks relative to the 75th percentile stocks, which represents the proportion of large-cap stocks in the overall market value. It can be seen that the current market concentration is at an all-time high.

The key to getting the market out of a healthy pattern

Wood pointed out that the most similar situation was in 1932! In order to facilitate understanding, we also included the trend of the Dow Jones Industrial Index in light orange during that period. It can be seen that after 1932, the Dow Jones Industrial Index slowly emerged from the worst period of the Great Depression, and Wood explained that this was due to the market slowly shifting from large-cap stocks to other stocks, and the rotation of stocks drove the upward trend of the overall stock market. .

Wood pointed out that there are still opportunities for the market to find a healthy pattern.

More deflation and lower interest rates will kick off another round of stock moves.

ARKK’s recent poor performance

However, the market has recently criticized the performance of ARKK. In the past year, QQQ, which represents technology stocks, has increased by 31% (orange line), the S&P 500 Index SPY has increased by 26% (green line), and ARKK has only increased by 10%. (dark blue line). And in this year’s bullish run, ARKK is down 15% year-to-date.

This article Is excessive market concentration a bubble? Cathie Wood pointed out two key factors first appeared on Chain News ABMedia.