There is much self-inflicted pain in markets caused by stubborn, antiquated measures, definitions, guideposts, dating back to who-knows-when and still the basis of the segmentation and the analytics, the theories and allocations, which have not much to do with what in actuality goes on out there, in the world where it most matters.
The More Markets Change, the More They Stay the Same, according to The Wall Street Journal, in a profile article that includes the following chart in support of the observation.
I’m sure there are clear demarcation lines somewhere that separate and organize the items in each of the listed pairs, but if the average investor were to take a minute and really think through what if anything these designations mean and what would cause a given stock to be in one and not another, it might take more than a minute to arrive at a dubious non-answer.
To keep things simple by focusing on the biggest of the subjects for this type of exercise, we can look at the grand five public companies that we sort of know as FAA[M]G, or Big Tech, or the Big 5: Apple, Amazon, Facebook, Google, Microsoft, listed alphabetically to avoid subjective bias. Eyeballing the categories again, I think these five could comfortably fit in every single one of every listed pair, except for small – which is itself a clue, I think, that we should dig a little further.
These were at one time small but they no longer are. And the trajectory has come about in record time, and hasn’t budged since the five’s grand arrival.
And now they keep on growing and expanding the area of their shadows, where all the others in this new market move around. In the chart below, the dark blue line down at the bottom stands for the 505 companies in the S&P 500 Index, which includes the five of the superior lines above. Were these to be stripped out, the index obviously would look worse, much worse…
How much worse exactly would depend on the percentage composition of the total that the Big 5 represent. As of June 30, according to Slick Charts, that figure stood at roughly 22%. So, of 505 stocks in the widely accepted benchmark index, five constitute more than one fifth.
It pays, I think, given this circumstance, to look to these Big 5 (which straddle all the standard categories, as mentioned) for particular analysis and profiling. What makes them special? What drives their largeness, value, growth, tech and non-tech, U.S. and all the world, and all of that?
A few years back I shared my views on what I believed (and still do) was the answer, and even though there’s been a lot that’s changed since then, the principle remains: Networks 3.0 – defined by digital dimensions. As I extrapolate from there to have a look at all the others in the referenced big list (i.e., look to the networks and their deep effects), here are some results:
All five of the top 5 comprise 22%, as has been said. Of the remaining 15 in the top 20, eight are similarly characterized (including two global finance institutions) and in the aggregate make up another 8% of the S&P 500. And because it pains me to leave out #21 and #22 on the list, as they’re such obvious examples, this adds another 2% to the total.
Thus, roughly 32% (rounding error excused) or almost one-third of the S&P 500 Index – that which is the standard of all performance measurement in markets – is supported by 15 companies (out of the top 22).
Each of these is different from the others in the grouping, judged by product, service, customer base, technology solution, location, and so on, but each of these is a very large and growing network. It may be about time to recognize this as a new market fact and standard, and draw some new conclusions, research some new metrics, publish new reports, maybe even build a whole new index. It helps, as a start, to be merely cognizant, as apparently the investors and traders implicitly already are.
Related reading: Interpreting the networks (2017).