It’s common to hear people talk about equity markets these days as though the only stocks that matter are large cap US technology stocks. The argument goes something like this:
‘We live in a time now where technology dominates our economy. As such, the big US companies who own these technologies (Microsoft, Apple, Amazon, etc.) have vast market values which dwarf the rest of the stock market. We live in a time of particularly high concentration in the stock market, where a disproportionate share of market value and performance is driven by just a small number of stocks.’
We thought we would have a look at the data to see if this is true. Are we living through a unique time for stock markets with respect to technology’s dominance and overall market concentration?
Here’s a quick definition of what we mean by ‘market concentration’. A market with high concentration is one where a small number of stocks represent a high % of the total value of the market. Lower concentration is the opposite.
The 10 largest stocks on the US stock market today represent 29% of total market value of all US listed stocks (of which there are thousands). This is a market with high concentration.
We looked at the past 100 years of stock market data to see if this level of concentration in US stocks is abnormal. Relative to history, this is a high level of concentration, the highest since the 1960s in fact. But current levels of concentration are not the highest in history. The period from the 1920s to the late 1960s saw market concentration consistently higher than current levels. This was a 50-year period where market concentration was higher than it is today.
So, the current US stock market is highly concentrated relative to history, but there have been long periods where it has been even more concentrated.
If we dig a little deeper and look at the companies which were the top 10 stocks in previous cycles of market concentration, we find that in, say, 1960, seven out of the top 10 stocks were: AT&T (communications), General Motors (automotive transportation), DuPont and Union Carbide (both chemicals companies), Kodak (film for cameras), IBM (computing) and General Electric (industrial and consumer goods). From our perspective today, these all sound like old fashioned businesses operating in old fashioned industries.
But when we talk about ‘technology’, what do we mean? A knife and fork are a form of technology, they replaced less efficient and less hygienic methods of eating, a major advance for the time. But none of us would now describe investing in cutlery as investing in technology. What we think ‘technology’ means from an investment perspective is whatever the newest technologies are which are improving productivity of the economy. 250 years about, the steam engine was leading edge technology, it was transforming the economy of Britain. Today, it is cloud computing, AI, and software which is on the leading edge of technology improving productivity and so we think of those companies as being ‘tech’.
In the 1960s, the industries which were transforming the economy and improving productivity were communications, personal transportation (cars), industrial chemicals, and household consumer goods. Advances made in these industries through the 1940s to the 1970s powered one of the biggest improvements in relative living standards of citizens in Western Europe and America ever seen. As such, from the perspective of an investor in 1960, these industries were ‘tech’. Using this definition, we find that 7 out of the top 10 largest US listed companies were ‘tech’ in 1960, and the top 10 stocks represented 31% of total US stock values.
Out of the top 10 US stocks today…. 7 out of 10 are tech. The top 10 represent 29% of US stock value.
Markets today are really not that different from markets of the past!
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