4 stock charts that will blow your mind
Every investor should read and pay attention to market news when it comes to individual stocks. They also want to make sure they’re on top of important market themes that might lurk beyond the headlines.
Along these lines, there are four charts that tell important stories for investors and provide hard data, rather than just speculation. What they reveal might be mind-boggling to some investors, maybe even to you. Keep this information in mind when managing your portfolio.
1. There is a lot of concentration of capital at the top
The market has always been dominated by a small number of stocks, but concentration is reaching historically unprecedented levels.
The chart above shows that the top 10 stocks represent a much larger share of total market capitalization than at any time in the past two decades. The top 10 stocks now represent almost 30% of the total market value. The five largest companies in S&P 500 – Microsoft, Apple, Alphabet, Amazon, and You’re here – are even more disproportionate and represent more than 20% of the overall capitalization.
This concentration changes the direction of the performance of the main stock market indices and has a fundamental impact on index funds. The âmarketâ is much more geared towards massive tech and software stocks, so headlines are less representative of all the stocks that make up the S&P 500, Nasdaq, Where Dow Jones Industrial Average. There are hundreds of large companies in different industries that are most likely not performing according to the indices.
Compared to previous years, total market returns are exposed to higher growth companies, which could increase potential returns. It also creates new forms of risk. These stocks have higher valuation ratios and lower dividend yields than market leaders in past periods, so it’s fair to expect more volatility. This could lead to bigger losses in bear markets.
Ultimately, index investors don’t get the same level of diversification that has traditionally been the cornerstone of passive investing strategies. More than ever, it is important to understand the exposure of your investment portfolio.
2. The market greatly exceeds the GDP
Equity returns have exploded beyond overall economic growth in the United States, and the gap has widened particularly since the Great Recession of 2007-2009.
The chart above shows the cumulative percentage growth of the S&P 500 and monthly GDP in the United States over the past 30 years. There are a few things that are fueling this lag. Most of the bigger companies are multinational, so they’ve captured economic growth outside of the United States in places like China, Southeast Asia, and Southeast Asia.
The continued growth of software is also contributing to this trend. Large-cap tech companies are growing much faster than the economy at large, as things like basic materials and consumer staples are much more anchored in GDP.
3. The volume of IPOs soared in 2021
Number of initial public offerings (IPO) is high.
Part of that can be explained by pent-up demand after the disruption in the first half of 2020, but there’s more going on here. Last year’s 480 IPOs were the most public company launches in a year since 1999, when 476 companies went public. In 2021, we’ve already had 951, almost doubling the high total of 2020 – and the year isn’t over yet.
There is more “unicorns” under construction these days due to the growing influence of venture capital and start-ups. These companies are often created for the purpose of a big exit in the form of an IPO. Equity investors are also more comfortable with high growth companies that don’t expect to be profitable anytime soon. This means that start-ups can successfully go public earlier. The PSPC explosion has also dramatically inflated the number of IPOs over the past two years, although this effect may wear off.
Companies are also encouraged to go public in the current market. High valuations translate into higher earnings for early stage investors, and they produce more cash to fuel continued growth. Speculation on changes in the taxation of capital gains may also have prompted private investors to cash in before tax rates went up. Anyone can guess where the market is going from here, but we can conclude that a lot of savvy financial minds cash in because they like today’s stock market valuations.
4. Volatility issues could use some perspective
It has been crazy in recent months on the stock market. Investors simultaneously digest bizarre news on jobs, pandemic uncertainty, threats of high inflation, corporate earnings and impending Fed monetary tightening. It is created more volatility, which is measured by the CBOE Volatility Index (VIX).
So where are we really today? A high VIX indicates nervous investors who sell quickly, which is a necessary condition for a market correction or crash. A low VIX suggests a more upbeat environment where stocks can rise slowly and steadily.
Things have calmed down since last year, even compared to the rocket recovery that began in the second quarter of 2020. Still, investors are on edge with most of the pre-pandemic decade, and volatility is currently higher the lowest since the start of the year. Heaven isn’t falling on us, so don’t let irrational fear influence your investment decisions. However, don’t be shocked if we pick up a few pieces over the next few months. Make sure your allocation is set to generate growth while managing volatility, and stick to your plan.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Ryan downie owns shares of Alphabet (A shares), Amazon and Microsoft. The Motley Fool owns shares and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Microsoft and Tesla. The Motley Fool recommends Nasdaq and the following options: January 2022 long calls at $ 1,920 on Amazon, March 2023 long calls at $ 120 on Apple, January 2022 short calls at $ 1,940 on Amazon, and March short calls 2023 at $ 130 on Apple. The Motley Fool has a disclosure policy.