The Most Overlooked Condition of US Stock Markets

most overlooked red flag in US stock markets in 2019

Though the following condition was often a fact discussed in past years about US stock markets, for some reason, this year, it remains the most overlooked condition of US stock markets. Just a handful of stocks have contributed to nearly all returns in the S&P500 and the Nasdaq100 for a few years running now, with just six stocks (AMZN, NFLX, MSFT, AAPL, GOOGL, and FB) comprising 91% and 98% of all returns in those two respective indexes at mid-year last year, and also the stocks responsible for the bulk of the end of 2018 losses in both indexes when the S&P500 and NASDAQ100 respectively closed with a 6.24% and 4.36% loss. Obviously, the names of both stock market indexes have been massively deceptive for years on end now, when 491 of the 500 stocks in one index and 94 out of 100 in another are practically irrelevant to overall returns or losses. Both indexes should have been renamed the S&P6 and the NASDAQ6 by now. This year the NASDAQ100 and S&P500 have rebounded quite significantly, respectively with a 27.0% and 21.0% return as of 22 October, and their rebounds are being marketed to the public as a sign of a healthy rebounding American economy. But is this reality? The S&P500 and the NASDAQ100 are a market cap weighted index, meaning if one stock has a market cap 10 times larger than another, then its yield will be weighted 10 times more to the overall yield of that index.

20 largest US stocks by market capitalization

Currently, two US stocks listed above, AMZN and AAPL, both have market caps more than $1,000,000,000,000 and the top 10 US stocks by market cap as of 22 October have an aggregate market cap of $6.5035 trillion, or about a quarter of the aggregate market cap of all 500 stocks in the S&P500 index, a small number of stocks are always going to contribute the lion’s share of yield on any market cap weighted index, and thus, a good performing year for a market cap index, while marking a solid year for a handful of stocks, does not indicate a strongly performing overall economy and in fact, often disguises serious problems that afflict the overall economy. I have written several articles already about enormous problems underpinning the US and global economy here and here that are generally being undersold by the media while the media oversells indicators like US stock market performance that does not reflect the overall health of the economy by any means.

One glance at the explosion of the US Central Bank balance sheet from an already massive, out of control $860B at the end of 2007 to its present near even more out of control $4 trillion amount clearly illustrates that all is not well with the US economy. Furthermore, a quick glance at the top 20 stocks by market cap in the US stock market as of 22 October 2019 and their respective 12-month performance clearly indicates that, though the number of stocks that are responsible for total performance of the S&P500 has expanded this year over last year, it would be far more accurate to call this index the S&P12 or S&P20 versus the S&P500 because clearly only a handful of stocks continue to be responsible for the lion’s share of the cumulate performance of the entire S&P500 index.

explosive growth of US Central Bank balance sheet since 2008

J. Kim

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