Read This, Spike That

How Tech Dependent Is This Stock Market?

While several well-known tech names have led the market lately, their dominance is overstated.

By John Kimelman          
 

Getty Images/iStockphoto
 
 
One argument cited for why the bull market in stocks is in danger is the seeming narrowness of the recent gains.

As a recent report by Goldman Sachs pointed out, just five tech stocks – Facebook (ticker: FB), Apple (AAPL), Amazon.com (AMZN), Microsoft (MSFT) and Google parent Alphabet GOOGL (GOOGL), otherwise known collectively as FAAMG -- have accounted for roughly 40% of the Standard & Poor’s 500’s gains this year.

(The Goldman Sachs report has been cited as a catalyst for a selloff among the big tech names last Friday.)

At times it seems that the number of articles in recent months devoted to FAAMG and FANG (the latter collection of stocks includes Netflix outnumber articles about the stock market itself.  

But a few pieces of market research published in recent days suggest that too much is being made of the role that these sainted stocks have contributed to the bull market.

Cliff Asness, an influential quant hedge-fund manager, is trying to debunk the notion that the stock market is all that dependent on the performance of a handful of big-tech names.

Writing on the website of his firm, AQR Capital Management, Asness argues that “Any way you slice the data, there isn’t anything truly exceptional about the last two calendar years even if you extend the period to include the strong 2017 FAANG performance through May.”

Asness continues: “In this case the “why” is pretty simple — calendar year 2016 was not a particularly great year for the FAANGs (and you may notice the news stories indeed died down for a while).‘’

He points out that Old Economy stocks like JPMorgan Chase (JPM), Bank of America (BAC) and Chevron (CVX) were among the top contributors to S&P 500 returns last year, while the FAANGs performed more in line with the rest of the market.

The pieces goes on to say that even looking at the last two years ending May 31, which includes the last five months of strong performance by the FAANGS – the contribution of returns of the five best-performing stocks in the S&P 500 is only at the historical average.

“So even including the recent resurgence, gains have not been particularly “narrow” at least as proxied by the impact of the top five contributors to S&P 500 performance,” he concludes.

Lawrence Hamtil, a principal with Fortune Financial, a wealth-management firm based in Overland Park, Kan., makes a related point.

Writing on his firm’s website, Hamtil argues that “even though the feeling is that the U.S. market (as gauged by the S&P 500 index) is currently dominated by several megacaps such as Apple, Alphabet, and others, the reality is that the current market weightings are fairly average, and perhaps even less top-heavy than it has been in the recent past.”

For example, he writes, the current market weighting of the top 10 S&P 500 components is a little more than 20%, with Apple holding the top spot at 3.73%.

“This seems fairly concentrated at the top until it is revealed that from 1980 through 2014 (the latest for which I have data), the average weighting of the top ten S&P 500 components was about 20.5%.”

Thus, he writes, “the current structure is nothing remarkable.”

Regarding the S&P 500’s heavy concentration in Apple, “this, too, is nothing remarkable,” Hamtil adds.

“From 1980 through 2014, the average weighting of the S&P 500’s top position was about 3.8%”

This certainly takes some of the bite out of FANG.

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