In this episode, Bridget and I discuss the concentration of stocks in the market, particularly the so-called FANG stocks (Facebook, Apple, Amazon, Netflix, and Google). We address concerns about a few stocks driving the market and the potential risks associated with that. We analyze historical data and market trends to provide a broader perspective on the issue. We also explore the changing nature of companies and how they are categorized, using examples like Amazon and IBM. Overall, we emphasize that while the concentration of stocks may be higher than in the past, it is not unprecedented, and does not necessarily indicate a broken market.
John: For the last several years the stock market has been driven by the so-called FANG stocks. Are you concerned about only a few stocks driving the markets and the risk that comes with that? That's going to be our topic on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. And before we start talking about FANG stocks and market concentration, please subscribe. It helps us find more people and connect with more people. So John, the FANG stocks, let's go over them first.
John: They have an acronym for everything, right?
Bridget: Right. In FANG we've got Facebook, Amazon, Apple, Netflix, and Google.
John: And Google, right?
Bridget: Yeah. Not included, but high market concentration is Microsoft, which is number two, but they didn't make FANG.
John: "M," doesn't fit in that nice acronym very well. I think that's the problem with that.
Bridget: Yeah, exactly.
John: I don't know if you get many questions, but we'll get folks that talk about that periodically because the press says things like, “Hey, these are the things that are driving the market. When these stocks go up, the market goes way up.” And there's been some evidence that over the last five or seven years we've had some pretty good market returns overall. But if you take out those stocks, the market hasn't been doing very much. And they're a big portion of the whole S&P 500, the whole market in general.
Bridget: Yeah, they're over 20%. The top ten stocks are over 20% of the value of the entire market. So that's a lot of market concentration. And people justifiably think that seems like a lot.
John: Right. I've been seeing some of these things and so one of the things that I think about when I get these sorts of questions (and I'll be interested to hear your take on it) is I'll bring up a graphic here that shows some of the historical facts. And you're exactly right. You can see on the right-hand side of the graph here. It says at the very bottom, that gray bar, that these stocks constitute almost 22% of the market. And this isn't just FANG stocks. This is the top ten stocks in the U.S. market. So 20-plus percent of the market is just in those ten stocks. And you go, “Golly, that means that out of the S&P 500, the other 490 stocks are 80% of the market and ten are 20%.”
Bridget: And people might think, “Oh, these are all tech stocks. That makes me nervous.” Or people might think, “There're so many of these that are tech stocks. That's unusual.”
John: Yeah, well, so let's take a look at this. The one thing my eye gets drawn to is that bottom gray bar that says of the top ten stocks by market cap, what percentage of the market, of course, 22% these days. That's higher than it was ten years ago and higher than it was 20 years ago. But then take a look back to 1970. And granted, it's a long time ago, 50 years ago, though, it's at the same level. 60 years ago, it was 50% more than that. Look at those numbers back in the 30s, 40s, and 50s.
It feels like and some of the messaging that I hear says, “The FANG stocks and concentration of the market are unprecedented. We've never had this concentration of value in these stocks,” except for all the other times that it happened. But nobody talks about that stuff from the past. Instead, people say, “Oh, no, we've never been here before.” Even 20 years ago, it was just about at the same level.
And again, for me, anyway, I'm not saying don't be worried about it, but it’s not that we've never seen this before. It's part of the cycle. And it's helpful to think this is not new territory, that we've been here before. It gives me some confidence that this is not uncharted territory. And I think that can be helpful to think about.
Bridget: Yeah, I think that's absolutely correct. The other thing is let's go back to 1970. It seems like the Stone Age, right? 😊
John: That's right.
Bridget: Now, okay, we got AT&T. Wait, that's not one. What's number one? IBM. IBM is a tech stock in 1970.
John: Isn't that crazy?
Bridget: That’s probably before you were even born, John. 1970 is not associated with a computer boom. What were they doing in 1970? Starting to get payroll on computers? There were only the very basic things because this is so long ago with computers. And we'll put this graphic, which we got from Dimensional Funds, by the way, in the show notes, just in case you're interested. But another stock that I found really interesting to track was Exxon. I still think of Exxon as a big company, but Exxon has dropped off.
John: Yeah. Isn't that interesting?
Bridget: Yeah. So Exxon, which used to be a top, now isn't even a player. IBM is still around, obviously, and it was still in through 2010, but it's not one of the tech stocks that are in the top. It's still around, and it might actually be doing well, but it's not one of the top tech stocks anymore. So it's interesting because I think when you look at this graph, it's just hard to get a larger perspective on the stock market. Yet it is there; the data is there. This is kind of like baseball. The data goes way back.
Bridget: So the data is there, but we often get so focused on what's going on right now, what's important to me, what do I relate to, that we don't see the bigger picture.
John: I think that's such a great point, Bridget, and one of the things that I always ask is: is that perception accurate? Of course, the facts are sort of what the facts are. But then when looking at that bigger picture, sometimes the feelings can be very different than the reality. And I hear clients say, “Well, jeez, it's all these tech stocks. When tech goes down, we're going to be in real trouble.” And let's take a look at where we are here in 2020 on that concentration of stocks.
We have Apple, Microsoft, Amazon, Google. Pretty tech-heavy stuff, right? Facebook is in there as well. But then look at the other top stocks. Berkshire Hathaway, JP Morgan. Those aren't tech companies. Johnson & Johnson. Talk about consumer staples. Walmart. Visa. Right. And so, it's just interesting for me to think about my feelings when I hear people say, “Hey, it's so tech-heavy.” And I go, “Yeah, I accept that.”
And then I start to look at this and go, “Wait a minute. Yeah, there's a lot of tech, but it's not like Johnson & Johnson is a tech stock.” If the tech boat hits some rough waters, geez, maybe Berkshire Hathaway, maybe J&J, and Walmart are not having those same things. And so, for me, looking at this, I thought, “Well, hang on a second. Maybe it's not quite what I thought it was,” and I wouldn't have questioned it without seeing this chart.
Bridget: Well, and another thing I would say is that let's take Amazon. We think of that as a tech stock, but actually, it probably acts more like a retail stock. It probably acts a lot more like Walmart than it does like Facebook. It was lumped in because it was a tech innovator, but it's really just a conduit to sell stuff, which I suppose Facebook is, too.
John: But it's interesting with Amazon. This is not new information, but it just struck me that when Amazon started back in the 90s it was a bookseller. It said, “Don't go to Borders or Barnes & Noble but buy your books on Amazon.” And my kids who are only 10 and 11 years old, they don't think about Amazon as the bookstore anymore. They have no sense of where it came from.
Bridget: Oh, they put Barnes & Noble out of business. What is Barnes & Noble to them?
John: Right. But as you kind of look from left to right on the chart, it shows how things have changed over time. That's another interesting point. There are changes in what companies are and in what positions they hold. But there are also changes in what these companies actually do and represent, and how they work. That’s true for Amazon, and that might be the same for Exxon and for IBM and some of the other ones, where the IBM of today might not look anything like the IBM from 1970 when they were first doing payroll, and some of those other things.
So lumping those things in when you say, “Hey, these companies are driving the market,” is number one, from looking at this chart, yeah, they are, and in the last 20 or 30 years, it's higher than it has been, but it's not historically unknown. It's not crazy high. It’s not something to be super concerned about, thinking, “Oh, my gosh, the market's broken,” which is the sort of messaging I hear. Is the market broken because these stocks are driving it? Well, no, we've been there before. We'll see what happens. It might repeat, but it might not repeat itself. But that by itself doesn't mean it's broken.
And then the other thing is that what these companies are today is different than the old days when if you were a manufacturing company, you made cranes or cars or you were AT&T and you did phone stuff. That's just not how it is anymore. So some of those companies look very different. And we just had a discussion about Amazon. Is a tech company? Is it a retail company? Maybe it's a finance company, for all I know. As far as what goes on and you look at where their competition is, those lines have been blurred and maybe it doesn't have the same impact it used to.
Bridget: That seems like a great place to wrap up, John. So I am Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients in our firms. We'd love to hear from you if you're interested in talking to us. We're also both members of the Alliance of Comprehensive Planners, which is a group of nationwide, fee-only, holistic financial planners that think like we do. If you're interested in finding a local planner in your area that has the same approach, you can check out acplanners.org.
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