Is the movie market telling us something about the stock market?
Original Star Wars Poster. © 20th Century Fox.
Hollywood has had a decent year so far. Year-to-date box office revenues are up about 5% from 2014. But rather than reflecting a healthy, diverse selection, with more hits than misses, the boost has come almost entirely from a few blockbusters—Jurassic World, Age of Ultron, The Martian, and a couple others. Without those films, this would be a down year.
In this, the movie market resembles the stock market. So far this year the market is up about 2%, as measured by the S&P 500. But it’s been dominated by five tech giants: Microsoft, Google, Facebook, Apple, and Amazon. Without those companies, the market would be down for the year. Measured another way, the market average—weighted by market capitalization—has outperformed market’s median company. This has been a pronounced trend since April of this year. Is it a problem?
Cap-Weighted minus Equal-Weighted Index. Source: Bloomberg
Classically, a narrow market is vulnerable to a pullback. When the market depends on one sector or just a few companies to move higher, it’s considered weak. Ten years ago, the market started to narrow in July of 2007, more than a year before the Financial Crisis sent stocks down by 50%. But back in the ‘90s the S&P 500 was led by the largest firms starting in early 1994. The market didn’t top out for another six years—250% higher. Sometimes, a narrowing trend can last for a long time. Or it can reverse, as it did in 2012, without a big pullback.
This year, movies have been winner-take-all propositions. Audiences have been going to blockbusters or staying home. Right now, zero-cost money is available to mega-cap firms. They can use that cash for dividends, stock buybacks and other forms of financial engineering. The stock market seems to be saying, go big, or go home.
Douglas R. Tengdin, CFA
Chief Investment Officer