Why the Stock Market Might Be at Peak Concentration Risk

Tracy Alloway (0:00)

Hey there, Odd Lots listeners, we have a very special announcement. Joe and I are hosting our annual Frot Lots Pub Quiz on Thursday, February 13th in New York City, and it's gonna feature some very special guests and prizes. So come test your wits in finance, markets and economics for a chance to win the ultimate Odd Lots glory and hang out with your fellow listeners. Tickets are on sale now at events.bloomberglive.com/oddlotspubtrivia. You can also find links on our Twitter feeds or in the newsletter, and you can find the link also on our show notes. We hope to see you there.

SPEAKER_2 (0:42)

Bloomberg Audio Studios, Podcasts, Radio, News.

Tracy Alloway (0:58)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (1:02)

And I'm Joe Weisenthal.

Tracy Alloway (1:04)

Joe, do you remember when you first heard the term Mag-7?

Joe Weisenthal (1:08)

You know, I don't, if I'm being honest, but you know, these acronyms for big tech stocks, like they kind of, you know, people used to talk about fang, right?

Tracy Alloway (1:17)

I know, I was just thinking that. Like, when did the handoff from fang to Mag-7 actually happen?

Joe Weisenthal (1:24)

We need to do one of those like Google Trends, Ngram things. That's a good question, because he hadn't, and then there was like fang plus and then famg. And, but they're all kind of the same thing. It's just big tech stocks.

Tracy Alloway (1:36)

Right. So the terminology, the acronyms might change, but I think the subject is always kind of the same, and the concern is always the same. It's this idea that there is like a handful of big companies, usually tech stocks, that are driving the entire market.

Joe Weisenthal (1:54)

Yeah. And it drives people crazy, right? They're so big and they've grown so much, and the stocks have done so well over the years, and all these old strategies of like, oh, we're going to like buy cheap, or buy cheap, low book value, you know, price to book, and all these traditional investing patterns, it never mean reverts for years and years and years, except for like five minutes in 2022, they just go straight up. And the only test of whether you're a good investor or not is whether you're overweight.

Tracy Alloway (2:23)

Whether you bought tech.

Joe Weisenthal (2:24)

Yeah, that's it.

Tracy Alloway (2:25)

That really is the alpha nowadays. But you know, you see these numbers thrown around, like I think Goldman Sachs said that the top 10 stocks now account for something like 38% of the S&P 500, which is a record. And seems quite a lot on the face of it. And I saw another number out there saying 26 stocks now account for half of the entire value of the S&P 500

So, I think it brings up a bunch of interesting questions. How bad is the concentration? Is it intrinsically bad in and of itself? Is it actually that risky? And also, how are financial professionals and the market itself actually reacting to this concentration risk? So, I think we should talk about it.

Joe Weisenthal (3:13)

Totally. You know, I look at myself in the mirror and I say to myself...

Tracy Alloway (3:17)

Do you point at yourself like that meme?

Joe Weisenthal (3:20)

On some days, I point and say, you're a good... Because, you know, I'm just like a boring index fund investor from my retirement, you know? So, I point and say, oh, you're a good investor because you've been really long tech. And then on other days, I wake up and say, oh, you are really heavily exposed to 26 stocks. And so, you know, it's like, to, you know, glass half full, it's like good, but also makes me a little anxious.

Tracy Alloway (3:41)

You shouldn't take credit. You should give that credit to S&P and then... And then when the market collapses, you should blame them.

Joe Weisenthal (3:48)

I do. I say thank you to the wonderful fund managers at S&P. I only wish you hadn't, you know, every once in a while, they have a dud. It's like, why'd you pick that one? Anyway.

Tracy Alloway (3:58)

Or why didn't you include Tesla?

Joe Weisenthal (4:00)

Yeah, right. Exactly.

Tracy Alloway (4:01)

All right. Well, without further ado, we do in fact have the perfect guest for this topic, someone that I've wanted to speak to for a long time. And I can't believe we haven't had him on the podcast before. Major oversight on our part. We're going to be speaking with Kevin Muir. He is, of course, the macro tourist and a long time voice on FinTwit and writing on his blog as well. So Kevin, thank you so much for coming on Odd Lots.