Why the Stock Market Might Be at Peak Concentration Risk

There's a lot of talk right now about concentration risk in US equities. For instance, the top 10 stocks in the S&P 500 currently account for 38% of the total index, compared to just 17.5% a decade ago. And all the big winners have been tech companies like Apple, Nvidia, Meta, etc., prompting questions about whether investors are getting overly-enthused about AI. For some, it's also bringing back memories of the dotcom bubble. So just how concentrated is the US stock market right now? What exactly is "concentration risk" anyway? What does this trend say about the power of benchmark index providers like S&P? And -- crucially -- are market participants doing anything about it? In this episode we speak with Kevin Muir, a.k.a. the Macro Tourist, about why he thinks the market is now at "peak concentration," and what could change to reduce Big Tech's dominance. Read more: Index Providers Rule the World—For Now, at Least Nvidia and Five Tech Giants Now Command 30% of the S&P 500 IndexOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace, but help accelerate it? Find out more later in the podcast.

• 0:15Speaker 01

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• 0:45Tracy Alloway?

  Hey there, Odd Lots listeners. We have a very special announcement. Joe and I are hosting our annual Frot Lots Pub Quiz on Thursday, February 13th in New York City, and it's going to feature some very special guests and prizes. So come test your wits in finance, markets and economics for a chance to win the ultimate Odd Lots glory and hang out with your fellow listeners. Tickets are on sale now at events.bloomberglive.com/oddlotspubtrivia. You can also find links on our Twitter feeds or in the newsletter. And you can find the link also on our show notes. We hope to see you there.

• 1:27Speaker 03

  Bloomberg Audio Studios, podcasts, radio, news.

• 1:43Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

• 1:48Joe Weisenthal?

  And I'm Joe Weisenthal.

• 1:49Tracy Alloway?

  Joe, do you remember when you first heard the term MAG7?

• 1:53Joe Weisenthal?

  You know, I don't, if I'm being honest, but you know, these acronyms that for big tech stocks, like they kind of, you know, people used to talk about FAANG, right?

• 2:03Tracy Alloway?

  I know, I was just thinking that. Like, when did the handoff from FAANG to MAG7 actually happen?

• 2:10Joe Weisenthal?

  We need to do one of those like Google Trends, Engram things. That's a good question because you hadn't. And then there was like Feng plus and then fam. And but they're all kind of the same thing. It's just big tech stocks.

• 2:22Tracy Alloway?

  Right, so the the terminology, the acronyms might change, but I think the subject is always kind of the same and the concern is always the same. It's this idea that there is like a handful of big companies, usually tech stocks, that are driving the entire market.

• 2:40Joe Weisenthal?

  Yeah, and it drives people crazy, right? They're so big and they've grown so much and the stocks have done so well over the years. And all these old strategies of like, oh, we're gonna like buy cheap or buy cheap, low book value, you know, price to book and all these traditional investing patterns. It never mean reverts for years and years and years, except for like five minutes in 2022. They just go straight up. And the only test of whether you're a good investor or not is whether you're overweight.

• 3:09Tracy Alloway?

  Whether you bought tech.

• 3:09Joe Weisenthal?

  Yeah, that's it, that's it.

• 3:10Tracy Alloway?

  That really, that really is the the alpha nowadays. But you know, you see these numbers thrown around like I think Goldman Sachs said that the top 10 stocks now account for something like 38% of the S and P 500, which is a record.

• 3:26Joe Weisenthal?

  Yeah.

• 3:26Tracy Alloway?

  And seems quite a lot on the face of it. And I saw another number out there saying 26 stocks now account for half of the entire value of the S and P 500. So I think it brings up a bunch of interesting questions. How bad is the concentration? Is it intrinsically bad in and of itself? Is it actually that risky?

• 3:48Joe Weisenthal?

  Yeah.

• 3:49Tracy Alloway?

  And also, how are financial professionals and the market itself actually reacting to this concentration risk? So I think we should talk about it.

• 3:58Joe Weisenthal?

  Totally, you know, I look at myself in the mirror and I say to myself.

• 4:03Tracy Alloway?

  Do you point at yourself like that meme?

• 4:05Joe Weisenthal?

  I on some days I point and say, you're a good investor. Because you know, I'm just like a boring index fund investor for my retirement, you know? So I point and say, oh, you're a good investor because you've been really long tech. And then I and then on other days I wake up and say, oh, you are really heavily. Exposed to 26 stocks. And so, you know, it's like to, you know, glass half full. It's like good, but also makes me a little anxious.

• 4:27Tracy Alloway?

  You shouldn't take credit. You should give that credit to S and P.

• 4:30Joe Weisenthal?

  Thank you.

• 4:31Tracy Alloway?

  And then when the market collapses, you should blame them.

• 4:34Joe Weisenthal?

  I do. I say thank you to the wonderful fund managers at S and P. I only wish you hadn't, you know, every once in a while they have a dud. It's like, why'd you pick that one? Anyway.

• 4:44Tracy Alloway?

  Or why didn't you include Tesla?

• 4:46Joe Weisenthal?

  Yeah, right. Exactly.

• 4:47Tracy Alloway?

  All right. Well, without further ado, we do in fact have the perfect guest for this topic. Someone that I've wanted to speak to for a long time, and I can't believe we haven't had him on the podcast before. Major oversight on our part. We're going to be speaking with Kevin Muir. He is of course, the macro tourist and a long time voice on FinTwit and writing on his blog as well. So Kevin, thank you so much for coming on All Thoughts.

• 5:13Speaker 05

  It's great to be here. Thanks, Joe and Tracy.

• 5:16Tracy Alloway?

  Maybe just to begin with, it's the first time you're on the show. I've always sort of known you as this voice that's hanging around in the finance blogosphere. But what's your background?

• 5:28Speaker 05

  So I was the equity derivative, institutional equity derivative trader at RBC Dominion Securities in the 90s. I was kind of at the forefront of the technological boom and the automated trading and the index trading and the taking off of all these index products. And then in 2000, I actually went off on my own and I thought, maybe, you know, I'll go work for a hedge fund. And I thought, well, at the same time, I could go and trade for myself for a little bit and see how that goes. And that's kind of 25 years later and I'm still doing it.

• 6:00Joe Weisenthal?

  You write the macro tourist. What's your goal? What do you, for those, I, we're both big fans of your writing. But what do you, what, what do you like to write about? What's your, what's your sort of goal with your writing?

• 6:11Speaker 05

  Well, Joe, it originally started off as a diary and I just kind of, good traders, you're supposed to keep a diary. And I, and I would start writing things and then people would phone me up and ask me what I thought of the market. And I would send it off into the my, just go, well, here's what I wrote in my diary. Eventually they started to ask often enough that we just started to put it up on the net. And then it took off from there. And from there, I ended up going and actually started my podcast and meeting all sorts of people. And one of the kind of just great parts about being on the podcast is the fabulous people I got to meet. Along the way, I meet people like Jim Leitner and I've had Mike Masters on the podcast. And those people are market wizards. They're terrific. And I get to share ideas with them. And it's just, I consider myself one of the luckiest guys in the world.

• 6:56Tracy Alloway?

  So let's get to the topic at hand then. Give us some context around concentration risk in something like the S and P 500 right now. I threw out some numbers earlier, but how, how extensive is this concentration? And should we be worried about it?

• 7:15Speaker 05

  Well, Tracy, one of the things that people will kind of push back on when you say that the U.S. has become more concentrated is they'll say things like, oh, but if you go look at other indexes around the world, they're also very concentrated. And that's absolutely correct. There's no doubt about it. This is something that is experienced in Canada. I, as I mentioned, I'm a Canadian and I was on the index desk at a time when Nortel was actually 35% of the entire index.

• 7:42Tracy Alloway?

  Wow.

• 7:43Speaker 05

  So if you think that you guys are, were having trouble dealing with this now, just imagine having 35% of the index being one stock. It was actually even worse than that because we had kind of a palm at triple M situation where Bell Canada was one of our next biggest stocks. And it being holding with all of its Nortel holding. So it ended up being that the index managers were stuck. Because if you think about it from a fiduciary point of view, it doesn't make sense to have 50% of your portfolio, you know, exposed to one stock. It's risky. And so one of the things that I, that I'm hearing now, when you bring up the, the problems about concentration risk in the U.S. Is they'll say, oh, no, but don't worry. It's actually much better than the rest of the world.

• 8:26Speaker 05

  And I won't deny that for a second. But isn't that kind of like saying, you know, my Mercedes is now using plastic knobs. But don't worry, the Honda uses plastic knobs too. Part of the reason that we've been, that investors have been attracted to the U.S. is that it is a diversified basket of many stocks. And just think about, you know, Warren Buffett. Warren Buffett tells you you can buy the S and P 500, you can sleep at night. But if you go and talk to investment advisors around the world and you ask them, do you think your clients really, truly know what's underlying that basket? I think they, most of them would say they would assume that it's roughly equal weight.

• 9:07Speaker 05

  And they would be shocked to learn that, you know, Microsoft, Nvidia, Apple are each almost 7% of their basket for a total of 21%. And so it ends up being, it's a worrisome kind of new development in the US. And I don't buy the argument that just because other countries are more, you know, concentrated that we shouldn't worry about it in the US. And all you have to do is look, you, Tracy, you mentioned that Goldman Sachs stat, and they have another one that they published and they went back, they looked at concentration risk throughout the last century. And if you look at it, we are now just as concentrated as we were right in front of

• 9:45Speaker 05

  the Great Depression in 1929, in the Nifty 50, in the early 70s, and the dot com bubble in the late 90s. Well, all those times were not good times to buy stocks for forward returns. So increasingly, I think that we need to be aware that this is a risk and there's more and more conversation happening around that.

• 10:23Speaker 00

  What's next for virtual assets? I'm Jacob Grease, host of Economy Scale, a series exploring growth in key global sectors. And this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 10:39Speaker 05

  We're seeing a lot of insocial players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service insocial clients.

• 10:47Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Rhys Merrick of Ripple says.

• 10:55Speaker 06

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 11:14Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 11:23Speaker 01

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• 11:54Joe Weisenthal?

  I'm happy that Nvidia has been 7% or somewhere south of that in my portfolio. I didn't even have to do anything and I made a big allocation to one of the best performing stocks in the world. And not only that, I mean, I take your point about concentration and et cetera. And obviously very alarming. These are also account for a huge share of the actual earnings too. So, I mean, one, you know, there was a lot of concentration in 99, 2000 with tech, but a lot of those companies weren't really making that much money. These companies are earnings juggernauts.

• 12:32Speaker 05

  Well, no doubt, you're absolutely correct, Joe. And that's kind of the pushback to this argument that we're concentrated world. They'll say, oh, it's Mag7. It's a wide variety of different companies that do different things. It's not like it's all one industry. And not only that, the valuations aren't as crazy as they might seem. No doubt about it, you can make that argument. But let's just imagine tomorrow that the AI bubble doesn't live up to its hype. Let's imagine that all of a sudden we have some sort of earnings surprise and these stocks get halved. It's not that hard to imagine. We went through it in 2022. So if that occurs, I think that people will be quite shocked at how their supposedly diversified

• 13:17Speaker 05

  basket of stocks performs. And more importantly than that is that we can sit around and we can debate whether you should own this or whether this is prudent. But more and more fiduciaries, more and more risk managers, more and more institutional portfolio managers are looking at it and saying, this is dangerous. And they're looking for ways around it. And one of the things that many of these managers are bumping up against is that although the S and P 500 is actually in line with this following rule of this thing called the 25 550, which means that

• 13:56Speaker 05

  no one stock can have more than 25%. And the five stock, the biggest stocks that are over 5% can't add up to more than 50% of your portfolio. That that's an IRS rule that is called the 25 550 rule. There's no problem with the S and P 500 currently with that rule. But there is something called the Russell 1000 Growth Index. And increasingly more and more institutional managers are benched to that index. And what we're seeing is within that index, we're bumping up against that. And what's happened now is that Russell has realized that this isn't just kind of a fiduciary point of

• 14:37Speaker 05

  view. This is actually an IRS issue in terms of they cannot go over those things. So what we're seeing is there's changes in the rules coming to make sure that this index is capped.

• 14:51Joe Weisenthal?

  By the way, Tracy, Kevin mentioning how exposed everyone is to AI beta, so to speak. And I just want to give a plug. We had a really good contribution in the Odd Lots newsletter from Skanda recently on this whole thing. There's just both in stocks and the economy, and the real economy, there's just this like, we got, they better get this AI thing right.

• 15:15Tracy Alloway?

  Yeah, seems kind of important. Kevin, you mentioned finance professionals reacting to this concentration risk. So, okay, maybe your average mom and pop retail investor doesn't realize that the S and P 500 is not, you know, 500 equal weighted stocks, but certainly finance professionals do, and they're aware of both the risk involved in having a large concentration in just a handful of stocks and also some of the requirements around diversification. So, legal requirements that you just mentioned. Before we get into some of those changes, can you maybe just give us a little bit of background on the

• 15:55Tracy Alloway?

  importance of the index providers to the finance industry itself? This is sort of a pet topic of mine that I've written about occasionally, but how big a deal are the index providers now?

• 16:10Speaker 05

  Well, you're absolutely right to highlight that, Tracy, and I'm glad to see you have such an enthusiastic attraction to index providers.

• 16:20Tracy Alloway?

  I'm the only one.

• 16:21Speaker 05

  You're the only one that gets excited about it. But it is a big story, and one of the issues is that as indexing has become more popular, some of the kind of traditional, the first of the indexers have started charging more, which has created an opportunity for other index providers to jump into the loop. So, obviously, we all know the S and P 500, but then there's the FTSE, which is Russell. But there's also things like Morningstar, and even you guys at Bloomberg have a lot of great indexes, and you're competing on a lot of these things as well. So, what's driving that is kind of two factors. One of them is that there is the cost associated with the big ones. So, they're just trying

• 17:05Speaker 05

  to clients that have to pay tens and hundreds of thousand dollars for this index data is are changing providers trying to get something cheaper. And then the other thing is, is a little more kind of nefarious. There's some indexes that are easier to beat. So, if you have an index that you know the rules, you can actually front run them. When I was researching this and learning about this, someone told me that it's important that you buy the products of the indexes that are difficult to beat. And then from a kind of client perspective, you choose, if you are a portfolio manager, you choose the indexes that are easier to beat.

• 17:45Speaker 05

  Because if you're using, for example, the S and P 500 as your benchmark, that's a lot more difficult to beat than another index that might have one annual revision that is easy to forecast and run ahead of.

• 18:00Tracy Alloway?

  Joe, I should just mention, Kevin was kind enough just then, because he's a very polite Canadian, to basically do our disclaimer for us, which is that Bloomberg LP, the parent company of Bloomberg News, does own a bunch of different indices, but probably most prominent among them are the Bloomberg Bond Indices, and those were the Barclays Indices before. So I should just mention that.

• 18:27Joe Weisenthal?

  There you go. Thank you, Kevin, and thank you.

• 18:29Speaker 05

  Can I jump in with a little pro tip, since a lot of people are going to be Bloomberg users? One of the things is, if you go and you want to see, for example, the index move in the S and P 500, and you type in HMOV, you'll see that they actually, unless you pay for that data, you don't get the index point changes. But Bloomberg has the B500, which is very similar, and you can plot it in, and then all that functionality that you have to pay for on the other things, it actually works quite well on the Bloomberg Indices.

• 19:01Joe Weisenthal?

  There you go. So if you have a Bloomberg Terminal, but don't feel like paying for the S and P data specifically, Kevin just gave you a little bit of alpha there. But you know, actually, you talked about a front-running index changes. Why is it that easier, right? Like, S and P, they announce, oh, some new company is joining an index. How can you make money from those announcements?

• 19:26Speaker 05

  Well, you used to be able to. There was a huge opportunity before and there was hedge funds that devoted themselves to doing it. But now everyone knows the ones that are, you know, due to go in. And then there's hedge funds who actually have portfolios of all the stocks that are due to go in. And even not just hedge funds, even pension funds will go out and front run them because they realize that there's some alpha there. So at the end of the day, Joe, the problem is that the more people look at it, the less money there is to be made in kind of trying to guess those things.

• 19:53Tracy Alloway?

  All right. So let's get into how not just the benchmark index providers are reacting to increased concentration, but also how finance professionals are. You mentioned the Russell 1000. So give us a little bit more detail on what's happening there. So Russell 1000 is aware that there's intense concentration risk.

• 20:15Speaker 05

  Right. So they're jumping. So they're actually getting ahead of their problems of potentially going and bumping up against this 25 550 rule. And for those who are don't aren't aware of it, this isn't a new phenomenon. We actually had this in the summer of 2023, when Microsoft became too large of a position within the QQQs. And there needed to be an emergency rebalance where they reduced the size of Microsoft. And then we also saw this in the sector select XLK spider, where Nvidia ran up and it actually ended up again, we bumped up against that 25 550 rule, and they needed to be an emergency rebalancing there. And

• 21:00Speaker 05

  that was a situation where there was the way that their capping worked, it was this kind of very violent shift from selling Apple and buying Nvidia. And then kind of the next quarter flipped the other way because of the way that the stock prices moved, and they had to do this rebalance again the other way. And so this is the problem with that many of these index providers are kind of bumping up against in terms of they don't want to be too violent with their shifts. They don't want to go and get into situations where they're rebalancing all the time, trying to keep within this limits. And that is why the Russell in this R1,000 growth, which is one of the most popular

• 21:42Speaker 05

  growth indexes out there, they chose instead of using the five and the 50 rule, they used four and a half and 45, meaning that any stock above four and a half, if all those stocks add up to 45%, then they do this rebalance. Hmm. So they've kind of given themselves a little bit of extra, you know, room there in terms of the rebalance. What's interesting is that they had announced this, I don't know, it's a year ago because they saw this problem coming. Nobody was talking about it.

• 22:13Tracy Alloway?

  Oh, yeah. I actually went back to try to find articles on this. I couldn't find any.

• 22:17Speaker 05

  Yeah. The way that I came upon this, this idea and this, this kind of revelation about that this is coming up was actually one of my subscribers and a buddy sent me something from Kevin Che from Discipline Alpha. And he'd written this whole piece about it and just highlighting it. And one of the reasons that he highlighted is he was a mid-cap manager during the 2000s. And he distinctly remembers Siebel Systems and another one, I can't remember the other one, but there was two big stocks in the S and P 400 that were due to go into the S and P 500. And when they did it, the trouble was that the guys that all bought it for the S and P 500.

• 23:01Speaker 05

  And then when the S and P 400 guys went to sell it, there was no bids. And that coincided with the top of the NASDAQ market. And he's very kind of adamant that this is, could be another situation where we have a situation where the Mag 7 has to go down in, in waiting in one of the biggest indexes out there in terms of after the S and P 500, this is probably the next biggest growth index out there. And when this rebalance occurs, which again is in March, ironically, it's the same deal, there's going to be millions and millions of shares of these Mag 7s. For sale. And when I, so for me, when I was trying to learn about it, I went and said, okay,

• 23:46Speaker 05

  I went to an old buddy at TD and they were one of the few, and I think he said he was the first sell-side dealer to actually start talking about this. But increasingly, over the last month, there's been more and more folks paying attention and realizing that this is a bigger deal than they realized.

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• 26:02Joe Weisenthal?

  By the way, as Tracy knows, I love dot com era trivia and talking about that. And so like you talk about Siebel and you talking about the three com palm situation and all the, these are like, these are some of my- Catnip for- Yeah, this is a total catnip. You know, it occurs to me like the sort of, the very strict Chicago school, there's no such thing, everyone, people love to say, there's no such thing as like you can't as passive investing. You can sort of get close to it. You know, the strict Chicago school people is like, you know, you buy the global market portfolio at their market value, every investable asset in the world.

• 26:45Joe Weisenthal?

  These rules essentially make it impossible, right? Because if you had some stock that was, I don't know, got so big, it was 25% of the index or whatever, but you're not allowed to do it. Technically, like you really couldn't buy the true market portfolio, given some of these constraints.

• 27:04Speaker 05

  That's correct. And that's an IRS constraint. And then not only that, just stop and think about if you go and you try to recreate these portfolios-

• 27:12Joe Weisenthal?

  Yeah.

• 27:12Speaker 05

  At a broker.

• 27:13Joe Weisenthal?

  Right.

• 27:13Speaker 05

  I spoke to one investment advisor. He said, if I went and made a portfolio of the QQQs, like if I just made it from scratch and did all those things, that compliance would tell me that I'm too concentrated in tech stocks. So he says, I'm not allowed to buy this from a, from a compliance point of view, but I'm allowed to buy the client's QQQs. And that's back to my point is that we all just kind of been lulled into this feeling that everything's okay. It's, it's a broad index and it's no longer as broad. And ironically, you're talking about this idea about the, the indexing. And if you remember Mike Green and his theory that-

• 27:55Speaker 05

  The big will get bigger because of indexing and more and more people will just continue. And this will create a situation where the biggest stocks will continue to just get bigger and bigger and bigger. Well, we're here. This is happening. And my pushback to that argument has always been that he's assuming the market doesn't work. He's assuming nobody goes and says, hey, wait, those stocks are too big. I'm going to go and no longer be benched to the S and P 500. I'm going to be benched to Russell 1,000 or maybe 3,000. I'll change it. And see, this is the problem is that many clients have kind of career risk.

• 28:35Speaker 05

  So if they're benched to the S and P 500, they can't go and put this huge bet where they don't own the mag seven. Or they just say, no, I can't own it. It's too expensive. They need to go and they need to own those stocks. But if you're a fiduciary that's managing money for someone and you go and you say, listen, this doesn't make any sense. We're buying this S and P 500 and the original reason why we did it was because it was supposed to be this diversified basket of the whole market. This no longer makes sense. Let's go try to find something else so you can change your benchmark. Now ironically, that actually takes a lot of hassle and it's difficult.

• 29:16Speaker 05

  You have to go and you have to convince all the users of your product or the, or the end clients to switch it. And that is why in this situation with the Russell 1,000 growth, instead of making a new benchmark that is capped. They said, no, we're just going to change the existing rules of the existing index. So if you want an unconstrained Russell 1,000 growth, there is a new index that Russell has created. But in this case, it's going to be everyone that is the Russell 1,000 growth. And it's a lot of them, like you go, you pull it up, you'll see 20 billion, 40 billion, lots of people with big, big accounts that are benched to this.

• 29:59Speaker 05

  They're going to all of a sudden find themselves overweight mag seven because there's a shift that's occurring on the March expiry, March 21st.

• 30:10Tracy Alloway?

  So Kevin, you mentioned Russell making this decision to change the existing index rather than create a new one. And this is exactly what I wanted to ask you about, which is, you know, when we talk about benchmark index providers, we talk about them as being passive, right? They always say they create these indices that are basically holding up a mirror to markets and trying to reflect them as they exist right now. And that kind of, I'm a little skeptical of that approach because I do think index construction affects things like flows. It's kind of reflexive. And I do think there are a lot of, you know, judgment calls that are embedded when you're deciding what to include and what to exclude. But if they're making an active

• 30:55Tracy Alloway?

  decision to change the weighting on something like tech, does that perhaps open them up to more scrutiny, perhaps from regulators?

• 31:06Speaker 05

  Well, I wouldn't say from regulators. It's more scrutiny from the clients. But in this case, they're not actually saying they don't want more tech. They're saying, we need to comply with this 25550 rule, which is an IRS rule. It has nothing to do with, you know, a decision that they think that the MAG7 has gotten too risky, right? The index providers are there to provide whatever index they think they can sell to their clients.

• 31:35Tracy Alloway?

  Right.

• 31:36Speaker 05

  If their clients want something, they're going to do it. And by that token, interestingly enough, we see the S and P 500 earlier this spring introduced a capped version of the S and P 500, which has individual stocks capped at 3%. Now, here in Canada, we've actually already listed an ETF based upon this index. But the reason that S and P has created that index is because there's a demand for it.

• 32:05Speaker 05

  And ultimately, the clients will drive it. And what I thought was so interesting about this whole development is that we're seeing index providers having to change their rules because of this 25550. Then we're also seeing institutional pension funds, endowments, starting to question whether they want to continue with benchmarks that have such a large concentration. And this is combined with the fact that many retail don't really understand what they're buying when they buy the S and P 500. So when I look at this situation and think about how this is going to play out going

• 32:45Speaker 05

  forward, it could, I can make the argument that we're kind of at the peak of concentration here. And that this is the market correcting what has become too concentrated of a market.

• 32:58Joe Weisenthal?

  You know, going back to this idea that the big just keep getting bigger. And you mentioned some of Mike Green's theories. And you know, there is this view that some have that like the funds themselves, the ETFs, the index funds like create this mechanical flows and that flows to the biggest stocks and they keep going up and et cetera.

• 33:20Tracy Alloway?

  Flows before pros.

• 33:21Joe Weisenthal?

  As Tracy has coined it. Do you still have that in your message, Nian Tracy?

• 33:26Tracy Alloway?

  I think I do, but only because I'm lazy and haven't been bothered to replace it.

• 33:30Joe Weisenthal?

  But on the other hand, we're recording this January 22nd. And one of the biggest stocks in the market, Apple, has significantly underperformed all year. And so the QQQ, the indices are up, but Apple is actually significantly down this year, concerns about iPhone sales. It still looks to me that maybe there is some mechanical flows going on, but there is individual security selection and marginal price setting still happening. So that despite like all these, the flows that on some level, you know, that there, you know, if a company is, if there are concerns about a company's performance, it doesn't just mechanically go higher.

• 34:10Speaker 05

  You're right, Joe, but I would push back and say that I'm Cliff Asness camp that it's become a lot less efficient. There is less and less fundamental investors.

• 34:21Speaker 05

  Going out and actually buying and selling stocks based upon fundamentals. And not only that, Cliff won't tell you this, but if you think about it, part of the reason the market has become less efficient is because of quants themselves. They become a larger and larger portion of the trading in the market, these pod shops. And I have nothing against them. They're producing some absolutely stellar returns, risk adjusted. They're out of this world. They're terrific, but a lot of it is based upon following momentum and doing things like earnings revisions and other kind of pro, like short-term pro cyclical movements.

• 35:04Speaker 05

  So there's very little of the kind of David, the old David Einhorn, I'm buying a stock because it's for, you know, a 4PE and I'm planning on selling it at 7PE when everyone figures out that earnings are going to be better than expected. Now it's much more next quarter's EPS is going to be slightly higher. That means the earnings revisions tick up and therefore all of our models mean that you need to buy and everyone rushes into it and then the CTA's follow and it just ends up feeding upon itself. So I'm not quite sure I completely agree with you, Joe, that everything is great with the markets. It really does feel to me like it's become less efficient, not more.

• 35:43Tracy Alloway?

  All right, Kevin Muir, I am so glad that we finally got you on the show and we have to do it again. Thank you so much.

• 35:50Speaker 05

  My pleasure. Thank you for having me on.

• 35:52Joe Weisenthal?

  Thanks, Kevin. That was great.

• 36:06Tracy Alloway?

  Joe, that was so much fun. I'm so glad we finally had Kevin on the show and he even brought you, you know, dot com era ephemera.

• 36:13Joe Weisenthal?

  I know, I love it. I love this topic. I mean, I just think about it all the time. I even wrote about it in the newsletter this week. Every. Month, Bank of America does their hedge fund or their fund manager survey. And one of the questions they ask is, what do you perceive is the most crowded trade? And basically, like, almost every month for years now, it's been some version.

• 36:36Tracy Alloway?

  Back in Fang era.

• 36:37Joe Weisenthal?

  It's some version of big tech. And you know, like, you're like, typically you think, oh, this is a crowded trade. It can't go on. But the move has been to play the crowded trade.

• 36:47Tracy Alloway?

  Yeah, absolutely. And you're right, to some extent, that's been justified by earnings. But I think, I think there is like this reflexivity that I mentioned at play in the market where, you know, the big attract more inflows, they get more capital, they get bigger, maybe they get more pricing power, and then that leads to more earnings. So you have this sort of cycle going on.

• 37:09Joe Weisenthal?

  I mean, for whatever reason, we're in an era, and I would say, there is a winner take all in this across the economy.

• 37:18Tracy Alloway?

  Yeah.

• 37:19Joe Weisenthal?

  That you see for sure. And how much of that is financial flows? How much of it is real economic outcomes? I guess my inclination is still to look and say, you know, the earnings growth of these names are unbelievable. But whatever the reason, everyone is now all in on the same bet. And Kevin made the point about career risk, which is really key, which is that even if you think you've identified something else, or maybe a better way to diversify, et cetera, do you really want to be the one person who like, oh, I'm gonna like shave down my Nvidia exposure? Or do you just want to ride with everyone else at the same time?

• 37:57Tracy Alloway?

  You know what one of my favorite benchmark controversies is?

• 38:00Joe Weisenthal?

  Go on.

• 38:01Tracy Alloway?

  There's actually a lot of them. If you think about, you know, like, including Chinese bonds, including Chinese shares and things like that. But there, there was this big kerfuffle among Frontier and EM investors about Kuwait. Kuwait was included in the MSCI Frontier Index for the longest time. And a lot of people didn't like that because. Kuwait is this like fairly small country with only four million people and like a pretty small GDP and everyone was like, why can't we have more Vietnam or something like that? So eventually they they kicked Kuwait out of the frontier index and sent it to EM and everyone was happy.

• 38:42Joe Weisenthal?

  That's a good story.

• 38:44Tracy Alloway?

  Including Kuwait presumably.

• 38:45Joe Weisenthal?

  That's a good story.

• 38:46Tracy Alloway?

  Yeah, thanks. Shall we leave it there?

• 38:49Joe Weisenthal?

  Let's leave it there.

• 38:50Tracy Alloway?

  All right. This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 38:56Joe Weisenthal?

  And I'm Jill Weisenthal. You can follow me at the Stalwart. Follow our guest Kevin Muir. He's at Kevin Muir. Follow our producers, Kermit Rodriguez at Kermit Armin, Dashell Bennett at Dashbot and Kale Brooks at Kale Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots. We have transcripts, a blog and a newsletter. And you can chat about all of these topics, including index concentration and markets and investing in our Discord, discord.gg/oddlots.

• 39:23Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about benchmark index providers, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 40:21Speaker 01

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