On May 18th, I posted “Why Stocks Haven’t Tanked.”
At that point the S&P 500 was only down 12% YTD – which was surprising, given the terrible economy. I wrote that the big reason was that big companies really weren’t suffering that much – especially when you consider the performance of the major digital businesses that drive most of the equity markets.
Well, since then, the S&P is now only down 2.2% YTD. As we approach the second quarter earnings season, I decided to redo the analysis. As you can see, the story hasn’t changed – in fact concentration on the digital winners got even bigger.
In the top 100 US stocks, digital businesses surged – now up 34% YTD.
Nearly half of the market cap of the top 100 US businesses are in digital businesses. In addition, Tesla – a car manufacturer that investors see as “digital” is up a whopping 268% YTD. I made Tesla its own category since it was warping the analysis.
When you take into account the 24% of the top 100 market cap in health care and essential industries (like telecom or big box retail), nearly three quarters of the largest portion of the stock market is relatively pandemic resistant.
The rest of the stock market, the industrial, consumer, financial services, and other companies are also off their lows, but still down year over year. More importantly, they are making up a smaller and smaller piece of the overall market. And for the most part, they too won’t see much impact from the pandemic. Even banks, which might lose money on loan losses, will get bailed out from the government.
No doubt the pandemic is hitting certain sectors extremely hard, like retail, restaurants, bars, cruise ships, and airlines. Restaurants, bars, and retailers are often small businesses and don’t really affect the market. There are some travel companies, but they are a tiny component.
Earnings may change this outlook, as ad supported digital companies Facebook and Alphabet will likely have rough second quarter reports. Moreover, it is possible that the market is overvaluing the digital revolution on an absolute level, even though it is performing appropriately on a relative level.
In either case, the implications for the real world economy are pretty troubling. New virus surges in the Sun Belt will slow or reverse reopening. Small businesses with physical assets like restaurants, bars, and recreational facilities will stay closed or operate way below capacity. Small business operators will continue to be crushed while major companies will get stronger.
The problem is that 30 million people work in retail trade, leisure, and hospitality. Those industries are going to be crippled for months, so it is hard not to see near double digit unemployment going on for a while — not to mention the knock on effects as many companies simply stop hiring due to the uncertainty. Moreover, sales taxes will continue to be shrunk, hurting local and state governments.
With “pandemic economics” likely lasting through next year, the value consolidation will likely get even more pronounced.
The combination of digital employees and shareholders getting richer, millions of unemployed low wage workers, and governments running huge deficits is a recipe for extreme political backlash.
The Great Refactoring 