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Top-Heavy Stock Market Warning? What It Means for Your Investments and Financial Future

John Shrewsbury, RICP®

Top-Heavy Market Concentration at Unprecedented Levels

It is said to be unprecedented…but what does a top-heavy market mean for your financial independence?

According to a report by Reuters, the U.S. stock market is more “top heavy” than it has been in over 100 years. What that means is the 10 largest stocks in the S&P 500 now account for 33% of the market value of the index.

Historical Data on Extreme Market Concentration

If you look back to the times when there was extreme concentration in the market, more often than not the market followed up with double-digit returns. Of course, past performance is no guarantee that the future will turn out the same way…

But when you look at the numbers, there were seven periods of extreme concentration in the market, the latest being in 2020. Following those extreme periods of concentration, the market was higher by 23% in the ensuing 12 months.

Tech Bubble or Fundamental Shift? Analyst Views

Deutsche Bank analyst Jim Reid says “You probably only need to worry if you think technology is in a bubble or if a recession has merely been postponed. Reid says an aggressive, relentless rally is not itself enough to justify a big correction.”

So, is tech in a bubble? Most of those ten stocks are technology companies, and Ben Snider at Goldman Sachs says that the median valuation of today’s top 10 stocks is substantially lower than the comparable median in 2000, the last time a tech bubble burst. He also says those 10 stocks are three times more profitable than during 2000 or in 1973..another year the tech market collapsed.

In decades past, technology has been a lesser player in the overall economy. Today, technology can be thought of as being a dominant sector of the economy, much like oil and energy were in the late 1900s. Technology isn’t going away, and its influence and involvement in business will continue to be a foundational piece of the world economic picture.

Analysts also say the average S&P500 stock is relatively cheap.

Long-Term Investing for Market Volatility

All that being said, we would remind you that markets are volatile and that is why you want your plan to reflect a long-term time horizon for your equity investments.

Looking back to the crash of 2000, it took 7 and a half years for the full drawdown and recovery to take place.

At the other end of the spectrum, it took the market about 5 months to recover from the 35% downturn driven by the pandemic in 2020.

If you are an investor, your tolerance for a tumble in the stock market not only depends on your risk tolerance but your investment horizon. Remember, economic, political and financial crises come and go…but in the long run, stocks tend to rise.

Balanced “Money Bucket” Investment Strategy

Knowing that fact should guide and direct your planning to be sure there is enough time between now, and when you will need to spend your money, to let that bounceback potentially play out.

Most investors need buckets of money:

  • Money you might need at a moment’s notice, like an emergency fund.
  • Money you might need in a few years…that money should be conservatively invested.
  • And the third bucket is money you won’t touch for 15 years or more. This is the money you want to invest in stocks for growth and to help keep pace with inflation.

Top heavy or not, a well-balanced investment strategy can keep you on track, no matter what may be happening in the economy or the markets.

The opinions voiced in this video and blog are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

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