Market Stress and Volatility: Extremes of Capital Concentration

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Published on September 28, 2018

| 4 min read

Valerie Azuelos, Managing Director, Client Portfolio Manager


Let this one sink in:

The five largest stocks in the S&P 500 Index currently have a market capitalization equivalent to the smallest 270 stocks in the index.

While this level of concentration in larger-cap stocks is not unprecedented, the Intech Equity Market Stress Monitor™ has shown a steady increase in the capital concentration metric in U.S. markets over the last three years with no signs of slowing down.

The source of this concentration has largely been driven by investor’s appetite for growth stocks, in particular some large-cap tech stocks, which have been all the rage for a while now. As a result, the FAANGs: Facebook, Apple, Amazon, Netflix (sometimes interchangeable with Microsoft) and Alphabet, parent company of Google, have represented a significant portion of the gains made by equity indexes over the past few years.

Market Stress and Volatility Side Bar

Even in an environment of rising U.S. interest rates – where the cost of doing business becomes more expensive – investors continue to favor growth stocks despite global trade tensions and the potential for more regulations looming over giant technology companies.

Today’s capital concentration in U.S. markets, however, is not unique and by no means has reached a new record. During the height of the dot-com bubble, the top five market cap stocks in the S&P 500 Index had a weight that was almost twice that of the bottom 270 stocks.

In 1999, the combined weight of the top five stocks in the S&P 500 Index was 17% compare to 14% today. The sector composition however, was more diverse, led by energy giant ExxonMobil, General Electric, Walmart, and Cisco Systems. Microsoft was the only technology stock to make it in the top five then and now.

Ten years ago, the top five stocks in the S&P 500 Index — ExxonMobil, General Electric, Procter & Gamble (consumer staples), Johnson & Johnson (health care) and Microsoft – were large well-established stocks from various sectors representing 12% of the aggregate weight of the index.

What has changed? The leaders seem to be concentrated in one sector: technology, and in one style: growth.


Is This Just a U.S.-Specific Phenomenon?

Non-U.S. stock indexes such as the MSCI EAFE Index on the other hand, are experiencing a decrease in capital concentration today, reflecting investors’ preference for smaller-cap stocks in this segment, which provides a tailwind for their performance relative to larger-cap stocks.

Capital concentration in smaller-cap stocks within the MSCI EAFE Index has not been this low since 1996, as seen in the Intech Equity Market Stress MonitorTM, an expression of extreme risk appetite.

While trending in opposite directions, the capital concentration in U.S. and non-U.S. markets are getting closer to extreme levels.

09-30-2018 Capital Concentration_SP500andEAFE

Whenever concentrations are extreme – not only high, but also low – that’s when signs of stress in the market are palpable. The Intech Equity Market Stress MonitorTM measures the deviation from normal levels of key risk metrics, and any extreme should be taken as a sign and warning that a return to the norm may shock the market and be a source of volatility.

The Intech Equity Market Stress MonitorTM helps highlight an increased likelihood of tail-risk events, which ultimately allows investors and plan sponsors to make more informed asset allocation decisions to protect their portfolios.

The Intech Equity Market Stress MonitorTM is a collection of five metrics: Capital Concentration, Correlation of Returns, Dispersion of Returns, Index Efficiency, and Skewness of Returns.

These are reliable indicators of equity market stress based on our 30-year history of studying volatility. You can use the monitor to gain insight to market risk regimes, contextualize beta risk management and complement your conventional risk metrics.

Intech Equity Market Stress MonitorTM Download the eBook that serves as a guide to our monitor. Download Now


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