Hooray for Hollywood?

Is the movie market telling us something about the stock market?

Original Star Wars Poster. © 20th Century Fox.

Source: Wikipedia

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

By |2017-07-17T12:22:21+00:00November 9th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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