Key Points

  • The market’s tenor changed in early September as economic optimism began to pick up; kicked into even higher gear since positive vaccine news erupted.

  • Rotations have been in fits-and-starts; and with changing characteristics; however, euphoria and speculative froth has become a risk heading into 2021.

  • Investors should maintain discipline around diversification and rebalancing.

September 2 was a momentous day on several fronts. It was the initial pop to all-time highs for both the S&P 500 and NASDAQ; after an impressive run from the March 23 pandemic low. It was also a turning point in terms of market leadership; reflecting budding optimism about a turn-for-the-better in economic data. As of the close on September 2, the spread between the performance of the “big 5” and the “other 495” hit its peak—at a whopping 62 percentage points. The chart below plots the spread on a rolling daily year-to-date (YTD) basis, through Friday’s close.

Big 5 knocked down a notch

As a reminder, the “big 5” are the largest five stocks in the S&P 500 index: Apple, Microsoft, Amazon, Google (Alphabet) and Facebook. By the way, these stocks often get lumped together as “tech” stocks; but the reality is they span three distinct sectors: Apple and Microsoft are in the Technology sector, Amazon dominates the Consumer Discretionary sector, and Google and Facebook are in the Communication Services sector. Because the S&P 500 is a capitalization (cap)- weighted index, the big 5’s weighty caps brought them to nearly 25% of the overall index as of early September.

Big 5 Has Trounced Other 495

Source: Charles Schwab, Bloomberg, as of 12/11/2020. Big 5 stocks include Alphabet, Amazon, Apple, Facebook, and Microsoft. Past performance is no guarantee of future results.

As you can see below (and via the spread above), YTD through September 2, the big 5 were up 65%; while the entire remainder of the S&P 500 were up only 3%. I typically cite this spread when I get the oft-asked question about the perceived disconnect between the stock market and the economy. At least at that point in the cycle; a market rewarding only a select handful of stocks at the expense of much weaker performance throughout the remainder of the index; was a bit reflective of economic conditions.

Big 5 Dominance Waning

Source: Charles Schwab, Bloomberg, as of 12/11/2020. Big 5 stocks include Alphabet, Amazon, Apple, Facebook, and Microsoft. Past performance is no guarantee of future results.