Market Cap Concentration Flag is High But Has Been Higher

Introduction: “Behemoths Have Dominated the Market Before, but Tech is Different,” WSJ, June 15, 2018 1
The 5 Largest Firms, “The Nifty-Five”, from Naïve to Nefarious?
A Study of the Tails, “The Nifty Five” vs. “The Minnows”
Fundamental Metrics of “The Nifty Five” vs. “The Minnows”
Conclusion: Mining Among “The Minnows”
Exhibit
Appendix: Incremental Thoughts on The Nifty Five

Introduction: “Behemoths Have Dominated the Market Before, but Tech is Different,” WSJ, June 15, 2018

We read the above article in Friday’s Wall Street Journal with great interest as Kailash Capital Research, LLC had very recently completed some analysis on exactly the issue so thoughtfully addressed by James Mackintosh. In the article Mr. Mackintosh notes that the 5 largest companies in the S&P 500 now represent an uncommonly large weight in the index. In our opinion his approach was as even-handed as an article dealing with such a bimodal issue could be. The partners at Kailash Capital Research, LLC and the partners of our product have to take views and make active decisions for the investors’ money we represent. In our case, we tend to hew to what history has to teach and act accordingly. Simplistically, our analysis of history indicates that the fundamental case for owning the 5 largest firms today has only been more tenuous and risky in the months leading up to the peak of the internet bubble.

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The 5 Largest Firms, “The Nifty Five”, from Naïve to Nefarious?

One of the hallmarks of this relentless bull-market has been that from 2009 through the end of 2014, the rally off the 2009 lows was fairly broad based with the largest 5 stocks representing an uncommonly small proportion of the index. Since 2015 however, the market has experienced a dramatic increase in concentration among the 5 largest stocks turning them into a modern day “Nifty Five.” In Figs. 1 and 2 below we show that the percent of the R1000 represented by the 5 largest firms, the “Nifty Five,” is approaching levels last seen during peak of the tech bubble and is now north of a 2 sigma event.² At the peak of the tech bubble, the Nifty Five represented 15.8% of the R1000’s market cap. Today, the Nifty Five represents 13.7% of the index and has been rising rapidly much like we saw in the internet bubble.

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