Watch Out if Bond Yields Rise in this Tech Heavy Market

Watch Out if Bond Yields Rise in this Tech Heavy Market

The current, tech-top-heavy market is concerning not just because it relies on a few stocks, but because it relies “on a few very similar stocks.” This according to an article in The Wall Street Journal.

The article reports that the five biggest companies today—Apple, Amazon, Microsoft, Alphabet and Facebook—comprise 25% of the market capitalization of the S&P 500, the highest percentage since 1970. The difference between now and then, however, is that in 1970 the group included IBM, General Motors, Exxon, Kodak and AT&T, all of which did very different things.

“The danger now is that the market is overly reliant on a group of companies that are all a bet in disruptive innovation—the big five and a wider circle including other fast-expanding  growth companies such as Netflix and Nvidia,” the article argues, adding that anything that hurts the group could drag down the wider market, even if other stocks are performing well. The added factor of low bond yields, it says, makes the group even more susceptible should yields rise.

The importance of this dynamic now, the article notes, is that “the price moves of the big stocks and the rest have begun to diverge much as they did in advance of several prior corrections—as the relationship between stocks and bonds has begun to shift.”

The article concludes that it’s premature to say that trouble is afoot, but “it wouldn’t be a surprise that a market reliant on central bank and government support should be threatened by rising yields, even when they start out so low.”