Today’s stock market is one of the most bizarre “new bull markets” in history.
In a bull market, a rising tide lifts all boats. In a bull market, distressed assets perform well. In a bull market, illiquid stocks push higher.
But none of that has happened here. Look no further than micro-cap stocks, which have been treading water for well over a year and are still way below 2021 levels.
Most investors don’t realize that they own market-capitalization-weighted indices in their 401ks or through ETFs.
What does that mean? A market-cap-weighted index is a type of stock market index in which individual securities are included based on their market capitalization, which is the total market value of a company’s outstanding shares. In such indices, companies with a higher market value have a greater impact on the index’s performance. This means that changes in the stock prices of larger companies will have a more significant effect on the overall index value than changes in the stock prices of smaller companies. This method of weighting is common in major stock market indices, such as the S&P 500 or the Nasdaq-100, providing investors with a snapshot of market trends and the performance of the largest and potentially most stable companies.
The Bottom Line
One can argue that this is a feature, not a bug, when it comes to passive investing. The issue here is that we’re reaching an extreme, where “the market” is being driven by a very select number of AI tech stocks. All other stocks, like micro-caps, aren’t participating. At all.
And the more those large-cap tech stocks become bigger and bigger contributors to a portfolio, the less diversified that portfolio is. The less a reflection that portfolio is of the actual health of the market, which in turn makes it less of a signal for the broader economy.
Now, could broader participation pick up? Of course! And if it does, there is an immense catch-up trade to come in small-cap stocks and areas which haven’t participated in the AI boom. That’s good news for those who missed the rally in companies like Nvidia (NASDAQ:NVDA) or who were largely underweight stocks in the past year. But this market environment isn’t showing signs of that yet. It’s not healthy, it’s not encouraging, and it may not even be real if AI mania proves out to just be another fleeting narrative.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
