4 Stock Market Charts That’ll Blow Your Mind

Every investor should be reading market news and paying attention to it as it relates to individual stocks. They also want to make sure they’re aware of important market themes that might be lurking beyond the headlines.

Along these lines, there are four charts that tell important stories for investors and provide hard data, rather than just speculation. What they reveal could be mind-blowing to some investors, perhaps even you. Keep this information in mind as you manage your portfolio.

Image source: Getty Images. 

1. There is a lot of capital concentration at the top

The market has always been dominated by a small number of stocks, but the concentration is reaching historically unprecedented levels.

Data sources: americanbusinesshistory.org, siblisresearch.com, author’s calculations. Chart by author.

The chart above illustrates that the 10 largest stocks make up a much larger portion of the total markets capitalization than any time in the past two decades. The 10 biggest stocks now make up nearly 30% of total market value. The five largest companies in the S&P 500 — Microsoft, Apple, Alphabet, Amazon, and Tesla — are even more disproportionately represented and make up more than 20% of overall capitalization.

This concentration changes the meaning of major market index performance, and it is having a fundamental impact on index funds. The “market” is much more skewed toward massive tech and software stocks, so the headlines are less representative of all the stocks that comprise the S&P 500, Nasdaq, or Dow Jones Industrial Average. There are hundreds of major companies from different industries that are very likely not performing in line with the indexes.

Relative to prior years, the total-market returns are exposed to higher-growth businesses, which could increase potential returns. It also creates new forms of risk. These stocks have higher valuation ratios and lower dividend yields than the market leaders in past periods, so it’s fair to expect more volatility. That could drive bigger losses in bear markets.

Ultimately, index investors aren’t getting the same level of diversification that has traditionally been a cornerstone of passive investment strategies. More than ever before, it’s important to really understand the exposure in your investment portfolio.

2. The market is outpacing GDP by a lot

Stock market returns exploded beyond overall U.S. economic growth, and the gap has grown especially wide since the 2007-09 Great Recession.

^SPX data by YCharts

The above chart displays the cumulative percentage growth of the S&P 500 and monthly GDP in the U.S. over the past 30 years. There are a few things fueling this discrepancy. Most of the largest companies are multinational, so they’ve captured economic growth outside of the U.S. in places like China, South Asia, and Southeast Asia.

The ongoing rise of software also contributes to this trend. Mega-cap tech businesses are expanding much…