Big Stocks Are Driving The Market
In August 2018 Apple became the first company in America to be valued at more than $1 trillion. Since then, both Microsoft and Google have joined the ranks of trillion-dollar companies, with Amazon knocking at the door.
The rise of the “mega-caps” – as they’re referred to (a company’s value is often referred to as its ‘market capitalization’) – has become a key driver of the stock market over the last three years. In fact, the combined value of the 5 biggest stocks in the S&P 500 Index is the highest it has ever been at 18% of the index.
Mega-Caps Dominate The Market
The reason for the dominance is simple: these top companies dominate their respective markets.
Almost everyone reading this blog has an Apple product, uses Google for search or Gmail, uses Excel and Word from Microsoft, or some combination of all three.
Yet history shows that things can change. Back in the early 1970’s the largest 50 stocks in the U.S. – whose name was coined the “Nifty Fifty” – dominated the economy. Among these stocks were film makers Eastman Kodak and Polaroid, two companies that clearly saw their fortunes change for the worse with the advent of digital photography in the 1990’s.
While it’s hard to envision life today without Apple, Google, Microsoft and Amazon, history shows that even these stalwarts will hit a wall at some point. When the Nifty Fifty met their match in 1974 and when the Tech Bubble finally burst in 2000, smaller stocks (“small caps”) took center stage and outperformed in the years that followed.
Many investors – including us at Financial Design Studio – preach the benefits of having a well-diversified portfolio.
As we watch the current crop of “mega-caps” dominate the market in ways we haven’t seen for a few decades, it’s good to remind ourselves of the benefits of diversification!
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