COVID vaccines are being rolled out all over the country enabling us to resume normal life activities and a $1.9 trillion stimulus package was passed allocating funds to stimulate the economy. Could there be better news for investors? Yet, the stock market declined most of the first week of March. To explain the disconnect between the economic fundamentals and the recent market direction consider the accompanying chart.
The chart plots the market value of the 10 largest stocks compared to the total market value of all stocks. You can see there has been a considerable increase in their proportionate value over the last 5 years --- until recently.
The 10 largest stocks by market value benefited the most from the lockdown and work-from-home environment. As a result, their earnings grew and stock prices rallied more in 2020 than the broader market. It was good news for their investors, but it makes reporting a strong earnings growth gain for this year more difficult than usual. The potential for missing their earnings growth target is driving investors to take some profits from these and select other technology firm holdings. Hence the decline shown at the very end of the chart.
As investors raise cash from last year’s winners and transition into firms overlooked by investors in 2020, the market is trading somewhat erratically. This is likely a temporary phenomenon. Viewed from this perspective, the recent market action makes logical sense. In fact, a broader based rally signals a healthy economy and stock market. That’s great news for all investors.