One thing I learned by playing, watching, and enjoying sports my whole life is that there’s nothing wrong with your best players scoring a lot of the points.
In fact, that’s exactly what they’re supposed to do.
One of the common misconceptions out there – it even drives anger and rage among market participants – is just how much bigger some of the mega-cap stocks are in America compared to all the small-caps.
They claim it’s unsustainable for one company to be larger than the entire Russell 2000 Index of small-cap stocks.
“Eventually, something’s got to give. This is not bullish for the market,” they claim and cry.
Well, here we are.
Stocks are at all-time highs, not just in the United States but all over the world.
And these mega-cap stocks are exponentially greater than the small ones will ever be.
Good.
You see, small-cap indexes, by definition, are always kicking out their best players.
Once a company reaches a threshold, it’s categorized as a mid-cap (a market cap greater than $2 billion), then a large-cap ($10 billion), and some of them eventually make it to mega-cap status (greater than $100 billion).
Of course the smaller companies are having a hard time keeping up.
According to The Wall St. Journal, the 6.6% annualized total return on small stocks over the past 10 years trails large-company performance by 7.3 percentage points.
That’s the widest gap going back to 1935.
Nvidia (NVDA) alone, at $4.2 trillion, is 65% more valuable than all the stocks in the Russell 2000 combined.
Has this been bad for NVDA? No. It’s at all-time highs. Shareholders are making more money than ever.
Has this been bad for Tech stocks? No. The sector is at all-time highs.
Investors are making more money than ever.
Has this been bad for the stock market? Nope.
Stock market indexes all over the world, not just in the U.S., are at all-time highs.
Only the people trying to buy a small-cap index that’s constantly kicking out the best companies are having a hard time.
But, remember, everybody’s wrong. These are the smallest, least relevant companies in the world.
Why should we treat them any differently?
The market doesn’t.
And that’s all that matters.
This Week in Everybody’s Wrong
On Monday, we gave a little credit to the crowd, which is usually right about most trends.
Still, we say Everybody’s Wrong on a daily basis.
And rarely is everybody this wrong.
On Tuesday, we talked about the importance of identifying the type of market environment we’re experiencing.
It’s a bull market, but speculators are underweight stocks.
Here’s why we have our offense on the field and we’re trying to score right now.
On Wednesday, we explored why it is that everybody is so wrong so often.
The simple fact is human beings are going to behave like human beings.
Here’s what we mean when we say “price is the only thing that pays.”
On Thursday, we discussed Bitcoin Dominance.
Think about what a world where Ethereum is worth $1 trillion looks like for other risk assets, like Tech stocks.
Here’s why we’re looking to add even more Crypto exposure.
On Friday, we took an expedition from the suburbs into the city.
Running around Manhattan meeting with traders and investors of all kinds revealed to me animal spirits remain tame.
We’re not seeing the crazy just yet, but I’ll let you know when it comes.
On Saturday, Senior Analyst Jason Perz told us about four assets aligning and what it means for the broader market.
It’s a regime shift, and it’s already in motion.
Here’s why our job right now is to recognize when the line goes tight.
Have a great Sunday.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs