Canterbury Market Update

Canterbury Market Update

Posted on October 21, 2020
Market Update
For this week’s update, we want to remind our readers of a piece we wrote back in July.  That piece was titled “Déjà vu: A Tech Bubble All Over Again?”.  A video version of that update can be found here.

Here are some key points we want to reiterate from that update:
  1. The S&P 500 current composition
  2. The Historical composition of the market and its movements
  3. It ain’t over until it’s over

The Current Composition of the S&P 500
We have stated this in a few previous articles, but the S&P 500 is broken down into 11 sectors: Information Technology, Health Care, Consumer Discretionary, Communication Services, Financials, Industrials, Consumer Staples, Utilities, Materials, Real Estate, and Energy.  These sectors each have a different impact on the S&P 500 based on their market capitalization or “market cap.”  Market cap is a stock’s total number of shares outstanding multiplied by the share price.  The larger a stock’s market cap, the larger the impact it has on the S&P 500.  For example, Apple is the largest stock in the S&P 500 and accounts for roughly 7% of the index’s movement.

Fun Fact: Apple has a larger market capitalization than the FTSE 100 stocks combined.  The FTSE 100 represents the 100 largest companies in the UK. 
Today, the S&P 500 is out of balance.  If we take the information technology sector, and include companies that are also considered technology-related like Amazon, Google, Facebook, and Netflix (if you remember, these make-up the FAANG index, which is a popular term a few years ago), the S&P 500 is now almost 40% weighted towards technology. 

Source: SPY ETF Holdings pulled from Koyfin

This means that 40% of the S&P 500’s movement comes from technology-related stocks.  Even more alarming, back in 2000 (when we saw a large technology crash known as the tech bubble), technology-related stocks accounted for 37% of the index.  Today’s technology weighting is now larger than it was back in 2000.  Any pullback in technology would carry the index down with it.

The Historical Composition of the S&P 500 and its movements

We just stated what the composition of the S&P 500 was back in 2000, and how today technology makes up a larger percentage.  According to sector market data, which only dates back to 1990, there has only been one other time when a market sector made up more than 20% of the market index: Financials leading into the 2007-08 financial crisis.

Markets have a weird way of balancing themselves out. Whenever a market segment becomes excessively large, the market has a tendency to rebalance itself.  In other words, after a sector has a large, parabolic run-up that causes it to gain a large market share, that sector would have to then experience a large drop to make it become a smaller, more balanced component.  We can see this following the Tech crash in 2000 and the Financial Crisis in 2008:
Sector Weighting Year End 1999 Weighting Year End 2001 Weighting Year End 2006 Weighting Year End 2008
Technology 29% 18% 15% 15%
Financials 13% 18% 22% 13%
Energy 6% 6% 10% 13%
Healthcare 9% 14% 12% 15%
Staples 7% 8% 9% 13%
Industrials 10% 11% 11% 11%
Discretionary 13% 13% 11% 9%
Materials 3% 3% 3% 3%
Utilities 2% 3% 3% 4%
Communications 8% 6% 4% 4%
Source: S&P 500 Historical Sector Weightings, Seeking Alpha

From the table above, you can see that technology made up 30% of the S&P 500 at the 1999 year end.  By year end 2001, the S&P 500 was much more balanced in sector weightings.  A similar event happened from 2006-2008 where Financials were over 20% of the market, but then took a crash and rebalanced the market.  Keep in mind, these percentages shown are for year end and are not necessarily the peak market capitalization of each sector.  Prior to the 2000 Tech crash, technology made up 37% of the market; prior to the Financial Crisis, Financials probably made up closer to 25% of the market.

Parabolic Curves All End the Same Way

Markets do not often repeat themselves, but they do have a tendency to rhyme.  What occurred in 2000 was what is called a parabolic advance.  This occurs when a market shoots up too far, too fast.  All parabolic curves end the same way: a sharp decline. 

The current run in technology, that has occurred over the last 10 years, looks pretty similar to the run leading into the 2000 crash.

Here is a 10 year chart leading into the technology crash of the early 2000s:

Source: AIQ Trading Expert Pro
And here is a chart of technology over the last 10 years:

Source: AIQ Trading Expert Pro

These two charts look eerily similar.

It Ain’t Over Till It’s Over
Markets have been a hot topic all year long and have been more volatile than they have been in a long time.  Never before have you seen a 30%+ drop followed by a full rebound in the span of less than 6 months, but that is what has happened.  That is not logical, not rational, and not sustainable.  High volatility, in either direction, is not good for the markets.

Technology-related stocks have substantially outpaced every other sector in the markets.  Looking at charts of technology, it looks like a tech bubble all over again.  Now, we are not saying that a potential bubble would pop soon.  Heading into 2000, technology just kept going up, up and away.  I am sure that move was fun to ride… until it wasn’t.  History might never repeat itself exactly, but it will often rhyme. This whole market move is not over. 

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.