Much has been written lately about the poor breadth and high concentration of the US equity market. The biggest 10 stocks account for more than 30% of the index market cap and in some cases each of the top three are bigger than developed stock exchanges such as London or Frankfurt. But, what is the path to normality? How does the breadth improve and the concentration eases? The chart below shows what happened in the past using the top 10 stocks per decade. As you can see, past concentrations were built over long periods of time, diluting themselves slowly as well. In our current case, the concentration has been very abrupt and very fast, going beyond the average of past decades, so it wouldn’t be surprising to see a faster than normal unwinding. Since it seems that 30% is the historical top that hasn’t been breached, the second part of the movement may start soon. The question that remains is: do we clean this phenomenon through a crisis or through consolidation?
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Source: Bridgewater Associates
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