I stumbled across this post by Rob Isbitts at Marketwatch a couple of days ago, found it interesting, and wanted to pass it along. The gist of the article is that the Dow-Jones Industrial Index and the Standard & Poors 500 have become very detached from the real economy:
When we sort the S&P 500 by market capitalization from largest to smallest, we find that only three stocks (Microsoft Corp. MSFT, +0.82% Apple Inc. AAPL, -0.49% and Google parent Alphabet Inc. GOOG, -0.20% GOOGL, -0.21% ) comprise 10% of the index’s total value. You’ve heard of “FANG†stocks? I’m going to call these MAG. And I’m also going to call them a sign of a dangerously narrow stock market. More on that later.
To get from the top 10% by market capitalization to the top 20%, you only need to add seven more stocks to the mix. They are Exxon Mobil Corp. XOM, -0.51% Berkshire Hathaway Inc. BRK.A, +0.01% BRK.B, -0.52% Facebook Inc. FB, +0.39% Johnson & Johnson JNJ, -0.14% Amazon.com Inc. AMZN, +0.83% General Electric Co. GE, +0.26% and Wells Fargo & Co. WFC, +0.00% Those seven plus MAG (10 stocks in all) comprise just over one-fifth of the S&P 500’s value.
Consider this table to see how detached that is from reality:
| Company | Total Revenue | Employees |
| Amazon | $107 billion | 222,400 |
| Apple | $234 billion | 115,000 |
| $74 billion | 61,814 | |
| Microsoft | $94 billion | 118,584 |
| Exxon Mobil | $269 billion | 75,300 |
| Berkshire Hathaway | $211 billion | 331,000 |
When you add net revenues to the equation it becomes even more grotesque. Amazon has less than $1 billion in net revenue. Apple, Exxon Mobil, and Berkshire Hathaway sell real stuff and have lots of net revenue. However, Apple’s market cap has become almost completely detached from its net revenues.
The Wilshire 5000 diminishes the concentration issue, although a total market index (fund – like Vanguard’s) is even better.
However, I’m not sure that’s your issue. I would note, though, that they are equity indexes, not revenue indexes. The fact remains, the economy and equity indexes have decoupled. And after all, those handy dandy earnings multiples are just short hand and supposedly reflect risk and expectations of future earnings which in turn are supposed to reflect the economy. Not now, in my book. Equity valuations are creatures of the Fed right now.
BTW – what are net revenues, other than the standard GAAP calculation for reserves and discounts? Are you commenting on revenues after material costs or purchases?
You say all this like it’s a bad thing (for the extremely wealthy, who are the only people that count).
Makes me think there is a lot of groupthink going on.
John Maynard Keynes, “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.â€
Steve
To your point, steve, financial markets are notorious for group think. (Although all the stats I’ve seen for the past 6 months show a rotation from institution to retail. It appears some are getting out of dodge.) However, I think more is at work here, namely the only game in town, or yield chase as I call it.
An interview with a Fed governor was quite explicit: they were going for wealth effect. Pure and simple. I think its been a travesty. And it didn’t work. But their hosing of savers, disproportionately older people, doesn’t seem to have shocked their sensibilities a bit. Is it political, ivory towerism or desperation born of fear and not having any other tool? You tell me.
How timely. The author of this is a gloom and doomer. However, to my knowledge none of the statistics he cites is in error. He’s peddling real data.
http://www.zerohedge.com/news/2016-05-11/11-signs-us-economy-rapidly-deteriorating-even-stock-market-soars
IMO the entire experience and, I guess, the point of this post is that the Fed has a problem. Boosting the values of equities or financial instruments only falls within the Fed’s mandate insofar as it promotes a sound currency, boosts employment, or keeps banks healthy.
It’s become increasingly clear that the Fed governors need to have some restrictions imposed on them. A rules-based strategy is the obvious solution but, just as many pilots resisted flying by instruments for decades, the Fed governors prefer operating by the seat of their pants.
The only other alternatives I can think of are so draconian it’s hard for me to imagine their being adopted. I’m open to suggestions but it certainly looks to me as though the Fed’s strategy is creating a nightmare.
I couldn’t agree with you more.
I saw an article today with a headline that actually made me click on it. “Hillary Wants to Shake Up the Fed.” I thought for once the woman might have something sensible to say. Stupid me. She wants more diversity. Who needs rules bases policy in an attempts to ensure sound money, output or employment? Our real need is more blacks, Latinos and transgenders. That’s the ticket. Although ABGJ (Anyone but Grandma Janet) might not be so bad…………