Market Health

Is This the “Nifty Fifty” All Over Again?

Since the COVID-19 pandemic began, eight S&P 500 Index companies have increased more than $100 billion in value.

So while large swaths of the economy withered and struggled over the last year, these select companies saw their business – and fortunes – boom.

On the surface, we can argue that this is a celebration of American innovation and that these standouts were in the perfect position to thrive. But underneath that, there are some troubling currents.

Investors are facing a situation they haven’t seen in almost a half-century. And the potential for something tragic to unfold is steadily rising.

The $2 Trillion Club Pros and Cons

For the long, seemingly endless months of the pandemic – now stretching two winters – we’ve highlighted the profit potential of tech.

Technology is what has kept the economy moving forward. And in today’s world, it has been a necessary distraction.

On top of that, Americans have spent billions of dollars on all of the peripherals needed to exist in our largely virtual world over the past year.

We see this reliance on tech in the dramatic rise of the Nasdaq Composite over the past year.
Nasdaq Demolishes Other IndexesThe tech-heavy index has easily eclipsed the performance of the Dow Jones Industrial Average and the S&P 500.

And when we look at the companies that have seen the largest increases in their market capitalizations over the past year, we see they are all Nasdaq-listed companies.
Largest Market Cap Increases Since Feb 19, 2020Apple (Nasdaq: AAPL) became the first $2 trillion company, its market cap ballooning to more than $764 billion since mid-February 2020.

Tesla (Nasdaq: TSLA) CEO Elon Musk was crowned the wealthiest person on the planet as the company’s market cap roared $581 billion higher.

And Amazon (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT) are well on their way to becoming the next members of the $2 trillion club after each company saw its market cap rise more than $390 billion over the past year.

Many of these are next-generation blue chips that every investor should probably have exposure to. But we should all be aware of another aspect of these gains…

A Nifty Lesson, 50 Years in the Making

Besides these eight companies that saw their market caps grow by more than $100 billion, there were another 11 companies that enjoyed market cap increases of at least $53 billion.

In total, these 19 companies accounted for more than half of the market’s gain over the past year. And they added $7.6 trillion in wealth to investors.

Now, some of this isn’t new. The FAANG stocksFacebook (Nasdaq: FB), Amazon, Apple, Netflix (Nasdaq: NFLX) and Alphabet (Nasdaq: GOOGL) – have represented a considerable portion of the market’s gains for years.

I have repeatedly stated that the markets go wherever these five companies go. They are the heaviest-weighted stocks on the major U.S. indexes.

This is a situation comparable to that of the “Nifty Fifty” of the 1960s and ’70s.

Those 50 companies – which included Avon, Coca-Cola (NYSE: KO), Eastman Kodak (NYSE: KODK), General Electric (NYSE: GE), J.C. Penney, IBM (NYSE: IBM), McDonald’s (NYSE: MCD), Polaroid, Sears and Xerox (NYSE: XRX) – propelled the American economy forward and were the driving force behind the bull market at the time.

They had high earnings growth and high price-to-earnings ratios.

And they were touted as “one decision” stocks: companies that investors bought and held forever.

But nothing in the markets is forever.

And when investors are concentrated in a handful of companies, the inevitable happens.

Surviving a Bear Attack

During the bear market from 1973 to 1974, many of the Nifty Fifty were hit much harder than the broader markets. Their shares collapsed 60% or more.

Sure, some of the Nifty Fifty are still alive and kicking today. Some of these highfliers merged, like Bristol-Myers and Squibb. Some are defunct, monuments to eras passed.

Unfortunately, this is a situation that repeats over and over again.

I have a tote bag from Lucent Technologies that hangs in my office.

It was given to me in the early days of my career as a reminder of what can happen. Lucent was once the most widely held stock in the country. Everyone owned it. And when the company missed on fiscal first quarter earnings on January 6, 2000, it not only marked the beginning of the end for a superheated tech bubble but also ruined scores of investors’ retirements.

Technology has been our salvation during the pandemic. It has enabled business to continue and has allowed us to “visit” family, friends and co-workers. The fortunes of many tech companies – and investors – have been buoyed by the run-up in their shares over the past year.

But this creates an even greater risk – overconcentration in a handful of stocks. When the rollover occurs, or when a bear market or correction reappears, these will likely be hit the hardest.

Now, a stock market drop won’t kill great companies. A number of the Nifty Fifty are still in business. Apple, Amazon and Microsoft have survived multiple bubble bursts.

But investors heavily weighted into just a handful of names – especially the wrong ones – can see their dreams of financial independence and a wealthy retirement crushed by these drops.

Here’s to high returns,

Matthew

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