US Economic News

[CityFarmer]

It shows the astronomical value of innovation, both to corporation, as well as individuals.

US stocks: the only six that matter
THE WALL STREET JOURNAL JULY 27, 2015 11:01AM


Many analysts are uncomfortable with the widening divergence between the top gainers and the rest of the US market. Source: AFP
Just a few companies are driving the gains in major US stock indexes this year, raising fresh concerns about the health of the market’s advance.

Six firms — Amazon.com, Google, Apple, Facebook, Netflix and Gilead Sciences — now account for more than half of the $US664 billion in value added this year to the Nasdaq Composite Index, according to data compiled by brokerage firm JonesTrading.

Amazon, Google, Apple, Facebook, Gilead and Walt Disney account for more than all of the $US199 billion in market-capitalisation gains in the S & P 500.

The concentrated gains are spurring concerns that soft trading in much of the market could presage a pullback in the indexes. Many investors see echoes of prior market tops — including the 2007 peak and the late 1990s frenzy — when fewer and fewer stocks lifted the broader market. The S & P 500 is up 1 per cent this year while the Nasdaq has gained 7.4 per cent.

Other indicators are also flashing yellow. In the Nasdaq, falling stocks have outnumbered rising stocks this year, sending the “advance-decline line” into negative territory, a phenomenon that has come before market downturns in the past, investors and analysts said.

Last Monday, as the S & P approached a record, nearly as many stocks hit one-year lows as one-year highs, according to Ned Davis Research, another sometime precursor to rocky times and a flip from 2014 and 2013 when the market rose more broadly. The S & P is 2.4 per cent below its May 21 record high. The Nasdaq hit an all-time high last Monday and has since fallen 2.5 per cent.

A rally driven by just a handful of stocks doesn’t necessarily mean the market has turned unhealthy or that shares will fall. Indeed, sceptics have been warning practically since stocks began their six-year-long rally in the spring of 2009 that a pullback was imminent, citing factors ranging from an uneven economic recovery to rising price/earnings ratios.

Still, many analysts are uncomfortable with the widening divergence between the top gainers and the rest of the market. Many see a stock market that is on the cusp of a shift — though of course no one can predict just what will happen.

“It can go one of two ways: Either the whole market tanks … or the market broadens out,” said Scott Migliori, who manages the $US740 million AllianzGI Focused Growth fund. “The rubber band has been stretched too far.”

Mr Migliori said he has been trimming holdings of internet and biotechnology stocks. Apple, Amazon and Facebook were among the fund’s top five holdings as of May 31, according to Morningstar.

Mr Migliori said he has moved into beaten-down industrial stocks, as well as shares of healthcare companies that have lagged behind the recent rally.

Earlier periods in the postcrisis advance were marked by broader stock rallies. In 2013, the Nasdaq soared 38 per cent, with the top three stocks contributing 17 per cent of the gains, according to JonesTrading. The S & P 500 gained 30 per cent that year, with the top three stocks contributing 8 per cent.

Gains in both indexes were more concentrated last year, though still less so than this year. The Nasdaq rose 13 per cent in 2014, with the top three gainers accounting for 32 per cent of the gains. The S & P was up 11 per cent, with the top three gainers contributing 16 per cent.



“In 2013 and 2014, you had these gangbuster years for the market and everything went up,” said Mike O’Rourke, chief market strategist at JonesTrading. “You have more money chasing fewer stocks now.”

This year, with the Nasdaq up 7.4 per cent, the top three — Amazon, Google and Apple — have accounted for 37 per cent of that gain. Amazon has surged 71 per cent, adding $US104 billion in market value. Google has gained 23 per cent, adding $US79 billion, and Apple is up 13 per cent, adding $US63 billion.

“It makes me cautious because I’ve seen it before,” said John Carey, portfolio manager of the $US5.2 billion Pioneer Fund, whose No. 2 holding is Apple. “There are some features of this narrowing market that do resemble what happened” in the late 1990s tech bubble.

On the eve of the dotcom crash in March 2000, the top six stocks in the S & P had accounted for all of the index’s market-cap gain that year, according to Mr O’Rourke.

Energy and materials stocks have slumped amid a downturn in commodity prices, while rising bond yields have dented high-dividend payers like utilities. Even shares of some longtime technology stalwarts have faltered. Shares of chip maker Intel Corp. are down 23 per cent this year, while cellphone technology firm Qualcomm Inc. is down 17 per cent.

Bull markets have featured thinning rallies in the past, including in the months leading up a swoon last fall in which the S & P 500 fell 7.4 per cent over a month. Ultimately, the broader market caught up and major indexes resumed their march higher.

Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management, which oversees $US193 billion in assets, said he isn’t worried for now.

Mr Mortimer said his firm in the first quarter pared holdings in some large-cap stocks that have pulled ahead, and moved into small-cap stocks overseas. But overall the firm remains optimistic on US stocks, and it doesn’t think the thinning in the roster of companies driving the indexes higher signals a major pullback is coming soon. “It’s not yet a warning sign,” he said.

To be sure, some remain concerned that stock returns will be limited thanks to high valuations. The S & P 500 is trading at 18.5 times the last 12 months of earnings, up from 17.1 at the beginning of the year and a 10-year average of 15.7, according to FactSet.

At the same time, a slowdown in corporate-profit growth and the prospect of interest-rate increases by the Federal Reserve, widely expected to start this year, have many investors on guard for signs of a faltering market. But then, that refrain has been heard many times in recent years.

“The game is not so simple where you can have a checklist that says, this has happened and that has happened” before a market pullback, said Doug Ramsey, chief investment officer at Leuthold Weeden Capital Management.

Wall Street Journal