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  • U.S. stocks power ahead helping U.S. indexes reach multi-year highs.
  • Capital concentration increases in U.S. equity markets on strong performance by large cap growth stocks, tech stocks in particular.
  • Non-U.S. stock indexes are experiencing the opposite - a decrease in capital concentration to lowest levels last observed in over 20 years, fueled by continued appetite for risk.
  • The Intech® risk Monitor shows unprecedented divergence in capital concentration between U.S. and non-U.S. equity markets.

Capital Concentration – High and Low

Despite jittery trade war news during the third quarter of 2018, the U.S. stock market continued its rising trend with the S&P 500 Index surging 7.7%, its biggest gain since 2013.

Within U.S. equity markets, growth stocks have surged, outperforming value stocks by 3.5% for the third quarter and 13% for the year. This comes after 2017, when growth stocks outperformed value stocks by 17%.

Capital has been concentrating at the top, with the five largest stocks in the S&P 500 Index currently having a market capitalization equivalent to the smallest 270 stocks in the index.

Most of the gains made by U.S. indexes were driven by the strong performance of technology names such as Facebook, Apple, Amazon, Netflix and Google-parent Alphabet.

But this rally in U.S. markets has come at the cost of further disconnect within U.S. stocks and across global markets.

The S&P outperformed the MSCI EAFE and the MSCI Emerging Market indexes by 6.3% and 8.7% respectively during the quarter.

And while this capital concentration is not unique and has not reached historical extremes, the Intech Equity Market Stress MonitorTM shows an increase in divergence between U.S. and non-U.S. indexes.

Unlike U.S. markets, non-U.S. indexes are experiencing a decrease in capital concentration reflecting investors’ preference for mid-cap stocks.

This marks the lowest concentration level observed in over 20 years, and is the first time the Intech Equity Market Stress MonitorTM has shown a divergence in capital concentration of this magnitude between U.S. and non-U.S. equity markets.

Capital concentration in smaller-cap stocks within the MSCI EAFE Index has not been this low since 1996, an expression of extreme risk appetite which could potentially bring increased volatility.

The Intech Equity Market Stress MonitorTM is a collection of five metrics: Capital Concentration, Correlation of Returns, Dispersion of Returns, Index Efficiency, and Skewness of Returns.

For all five metrics, the normal range is 40% to 60%. Anything higher or lower signals potential market instability, with extremes in the tails (i.e., less than 20% or more than 80%) indicating greater risk.

Intech® has been studying the relationship between risk and market stability for decades.

Rather than rely solely on backward-facing measures, such as standard deviation, investors can monitor market stability, or lack thereof, by noting where an index’s risk sits relative to its historic ranges. When markets veer too far from the norm, there is a higher probability of a large market event.

Other Indexes and Risks

  • The European Equity index, MSCI Europe, continues to be the market most strained, with four of five indicators at extreme levels. The largest change since last quarter is in the Index Efficiency measure, which declined from near historically high levels at the end of June. But current value is well within the upper tail of all historical observations.
    • A continued decline would potentially indicate an increased opportunity for a skilled active manager to achieve above-market outcomes with lower equity risk through diversification.
  • Emerging markets have been the segment that have endured the biggest change in risk. Less than a year ago this market showed the least amount of risk. Over the past quarter however, emerging markets have quickly become one of the riskier equity market segments, with four of five indicators now at extreme levels.
  • Global developed equity markets, the MSCI World Index, demonstrated the least amount of risk relative to other segments during the quarter. The largest change since last quarter is the Index Efficiency measure, which declined from near historically high levels at the end of June.

Any extreme across a collection of risk metrics and indexes should be taken as a sign of warning that a return to the norm may shock the market and be a source of volatility. 

The best course forward is to remain diversified within U.S. equities and across global equity markets, and prepare for the somewhat less likely but more significant move lower in equity markets.

 

Quarterly Report Download the latest Intech Equity Market Stress Monitor update. Download Now

 

Disclaimer
The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date of the webcast, and may be superseded by subsequent market events or other conditions. The information, analyses and/or opinions expressed are for general information only, and are not intended to provide any specific financial, economic, tax, legal, investment advice, or recommendations for any investor. It should not relied on as the sole basis for investment decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained in this webcast. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

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