The Incredible Shrinking Market
The number of companies required to mimic the returns of the S&P 500 had fallen to an all-time low at year-end 2019 to just 83.
The continued strength of the FAANGs+ Microsoft and a small coterie of other stock mean the effective number is now even lower.
The narrowing of market breadth now exceeds the previous low reached at the peak of the internet bubble.
The decline of the number of companies required to replicate the performance of the S&P 500 over the past 5 years has coincided with the growing popularity of passive investing.
These strategies reduce the effective number of index constituents by directing capital flows into the largest index components.
The downward pressure on the effective number of companies in the S&P 500 index is expected to continue if passive investing remains popular.
However, fewer effective index components increase the probability of volatility as a larger index weighting is distributed over a smaller group of companies.
This trend supports a thesis that the 2020s will be unusually volatile, producing both great risks and opportunities.
Written by Jonathan Baird, CFA
Successful investing has never been easy, and it has grown more difficult in the 21st century. The issues that produced the Crisis of 2008, such as sky-high debt levels, have never been properly addressed and lurk in the shadows waiting to reassert themselves. The global geopolitical scene is more tenuous now than it has been in decades. Thoughtful, independent analysis and opinion has never been more essential.
I created the Global Investment Letter in response to this need. Over a 30-year career as a money manager (primarily international/global equity mutual funds), I subscribed to a variety of independent research services. The information provided was essential input to my decision making while the opinions provided food for thought, especially if I disagreed with them! One good idea a year is worth many times the subscription price of a high-quality journal.
Prior to creating the Global Investment Letter I managed three different #1 ranked funds, most recently in 2010 when I won a Lipper Award for the best global equity fund in Canada. A good investor must have a practical knowledge of a range of disciplines, including economics, psychology, geopolitics and history. Gaining this knowledge and keeping current requires considerable time and experience. A quality source of analysis and opinion can make the process more efficient and lead to better decisions.
The Global Investment Letter is a monthly journal that comments on global capital markets. Geopolitical trends and historic backdrops are examined and their potential impact on markets is discussed. In addition, articles on various other topics that I feel may aid an investor, such as investment philosophy, book reviews, etc., are included periodically. An effort is made to keep jargon to a minimum.