For the first time in history, the S&P 500 is dominated by the top six stocks. Roughly 25% of the index’s market capitalization is comprised of Facebook (now Meta), Amazon, Apple, Microsoft, Tesla, and Google (Alphabet). Their domination of the index is bigger than any other bubble or period, including the Dot Com bubble.
What’s more is the top stocks in the index carried the lion’s share of the index’s returns. The graph below shows how the top stocks performed compared to their counterparts and providers a visual representation of their outsized impact.
The market is in uncharted territory since many stocks that reach top valuation heights are often replaced by newer, more innovative competitors. But the tech cohort continues to defy odds and remain at the top longer than any other group of stocks has managed to do before.
Investors are divided on what this means for passive ETF investing, since most of the index is swayed by the top ten companies. However, if history has taught us anything about the S&P 500, it is that change is constant. Below is a list detailing the top ten companies in the S&P 500 which account for over 28% of its entire market capitalization
The Winds Are Shifting from Wirehouses to More Robust RIAs
The investment landscape continues to evolve as wirehouses continue to lose market share to independent investment advisors and boutique financial planners.
According to ThinkAdvisor, “The wirehouses have been steadily losing client investment asset market share over the past decade and that trend is only expected to continue in 2022 and beyond” according to Aite-Novarica Group. The research firm expects the market share for non-wirehouse, self-clearing, retail broker-dealer firms to remain about flat between 2021 and 2025 and for discount/online brokerage firms to increase from 23.5% in 2021 to 26.8% in 2025.
This is in stark contrast to other businesses in the advisory space since wirehouses are the only segment to have lost market share every year since beginning of 2016. RIAs are leading choices for advisors and investors since they provide a high-touch environment without pushing them into robo-advising, a major complaint amongst wirehouse clients.
Analysts See a Hotter Business Cycle in 2022 and A Great Rebalancing
Among the many pandemic fallouts, business innovation and development were one of the most intense. Service companies were forced to adopt digital strategies and technology to survive, global supply chains were constrained, and the Federal Reserve increased the money supply more than any time in history to incentivize business growth.
Although some analysts think the markets may return to a pre-pandemic lull, Morgan Stanley believes the world is about to usher into a new era of digital deglobalization and ultimate rebalancing. Many countries observed the disruption caused by the U.S.-China supply delay, and they are turning to domestic production in response.
Labor markets are shifting since skilled labor can be found anywhere, and companies who do not adopt remote work will lose market share to competitors who are willing to invest in top talent without location tethers.
As a result, investors should be more selective about capital allocation since the Fed’s “lift all boats” strategy is waning and many companies that can adapt quickly will break ahead of their competitors.
The Federal Reserve Took Its First Steps to Reduce Its Balance Sheet Causing Investor Hesitation
The Fed’s balance sheet has been the center of conversation for the last few months. Since their bond purchases helped keep interest rates low and provide a constant money supply. The last major Fed “normalization episode” occurred in 2017, but analysts believe that this runoff will be faster than before.
Many believe that the intense quantitative easing strategies employed at the beginning of the pandemic are no longer necessary. Kathy Jones, chief fixed income strategist at Charles Schwab stated, “The fact that almost all participants agreed that it was appropriate to initiate the balance sheet runoff after the first increase in the target range for the fed funds rate implies that there’s not a big appetite for ‘let’s wait and see.” which led many to believe the Fed is ready to move soon.
Investors did not react well to the news, and stocks dipped on the announcement since interest rates may rise in the near future which will reduce purchasing power. However, government bond yields rose.
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For the Month Ending 12/31/2021 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
Every year, we celebrate plenty of New Year’s traditions. Watching the ball drop, watching (or attending) the party in Times Square, and making a toast are staples for people all over the world, but do you know where some of these trends originated?
- The first ball drop was in 1907. It was deemed a safer city alternative to fireworks.
- You can thank the New York Times for the Times Square NYE party. The newspaper opened its new building in 1904, and the inaugural party had over 200,000 attendees.
- Baby New Year is not really a baby at all, since he first started celebrating in ancient Greece around 600 B.C. He represents the rebirth that happens at the beginning of the New Year.
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.