In 1986 Diego Armando Maradona took his team by the hand and guided the Argentinians to a memorable World Cup victory.
I know… I know… He used his hand to take his team past the English…
That second goal against England, though. Simply divine.
The point is without Maradona’s dribbles, goals and assists, Argentina may very well not have won.
When we refer to the 1986 World Cup, we refer to the tournament of Maradona. His performance overshadowed everyone else’s.
A similar thing is happening in the stock market this year.
The S&P 500 has reached new highs and we’re in the longest bull market in Wall Street history.
Happy days for investors!
Or so it would seem.
Because if you take a closer look, you’ll see that just a handful of companies are doing the heavy lifting.
No more than three companies – Amazon, Apple, Microsoft – accounted for 35% of the S&P 500’s total returns this year.
It doesn’t look very healthy for the market as a whole to rely so heavily on just a few companies.
Is the bull market really red hot? Or is the exceptional performance of just a couple of superstars masking reality?
When Apple became the first trillion dollar company last month, Amazon couldn’t stay behind.
Yesterday the online shopping giant joined the 13-figure-club as the second company ever to cross this magical barrier.
Amazon’s rise is arguably even more impressive than Apple’s. It had to nearly double this year to breach the trillion-dollar mark.
That’s right. Amazon went from $600 billion in January to $1 trillion at the start of September. That’s a gain of $400 billion in just 165 trading days.
Amazon is up 74% this year. Impressive for any company, never mind a blue chip at the top of the market.
In all honesty, we can’t refer to the Big Tech companies as blue chips. Maybe we should call them “gold chips”.
Blue chips have a reputation for being relatively safe investments whose market cap doesn’t change a lot in any given year.
But the tech “superstars”, as they’re called, have a habit of doubling or even tripling in value in a short period of time, even when they’re already worth hundreds of billions.
The S&P 500, an index of the 500 biggest US companies, is up 8.34% this year. That’s a very reasonable yield. The stock market must be booming!
But the S&P’s success story is actually the success story of no more than five tech businesses.
These Fab Five are among the biggest companies on the market, which means their performance has an outsized effect on the broader market.
Amazon is up 74% this year, Apple 35%, Microsoft 30%, and Google parent Alphabet 15%. Netflix more than doubled this year, but after a pullback is still up 90%.
Up until late July I would have had to include Facebook on that list as well. It was up 20% by 25th July until it lost all the year’s gains again.
Still, before Facebook and Netflix ran into some headwinds, these six tech companies were responsible for an incredible 99% (!) of the S&P’s total returns.
As Morgan Stanley’s Lisa Shalett notes, the year-to-date returns have been “concentrated in a few stocks” the gains of which were “not representative of the challenges most investors faced”.
Take away Alphabet, Amazon, Apple, Microsoft, and Netflix and what do you have?
Not a red hot stock market, but a market that is more or less flat on the year.
Stock market mimics its superstars
No coach in the world would say no to a world class player like Diego Maradona.
He could create something out of nothing and break the deadlock with a single moment of brilliance.
But no matter how magical Maradona was, no coach would want his team to depend completely on one player.
What if he gets injured? What if the pressure of single-handedly fulfilling the hopes of a nation gets too big a cross to bear?
Stock markets made up of hundreds of companies can’t develop a dependence on a few stocks either. It’s too risky.
We only need to look at what happened in July to see why an index leaning heavily on a handful of shares is dangerous.
That’s when tech superstars Facebook and Netflix published disappointing results. Facebook dropped 20%, Netflix 7.7%.
It sparked a stock sell-off in the tech-heavy Nasdaq, which only halted when Apple and Amazon exceeded market expectations.
Tech stocks and the broader market immediately rallied on the back of positive news from today’s trillion-dollar companies. But I’m sure you can imagine what would have happened if Apple and Amazon had dropped the ball as well.
On a good day, the Maradonas of the stock market raise up the rest of the team. On a bad day, they take everyone down with them.
It’s a perfect illustration of the massive impact the tech superstars have on the market.
One of these companies reports bad news? SELL!
Another company follows with good news? BUY!
This makes a hell of a difference.
It’s always been considered quite safe to bet on indexes like the S&P 500 because their performance doesn’t depend on a single company.
Any company could run into a scandal that sends their shares plummeting. But the 500 biggest companies running into trouble all at once? That’s unheard of (except in a market panic).
That’s why big investment groups like pension funds and mutual funds bet big on index trackers. It’s a proven tactic to grow capital slowly but steadily.
However, if just a few companies grow so dominant that the stock market mimics their performance, it changes everything.
Index trackers start behaving more like individual shares, which makes them an awful lot riskier. That’s not where you want your pension money to be.
Amazon, Apple, Alphabet, Microsoft, Facebook and Netflix could be considered “Maradona stocks”, but other companies need to pick up some slack.
For as long as the market keeps mimicking the performance of just a handful of companies, it will be very vulnerable to a major correction.