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The 800 Pound Economic Gorilla

The 800 Pound Economic Gorilla

June 12, 2023

According to Idioms Online, to characterize an organization or company as an 800-pound gorilla means that is so powerful it operates with no heed to the rules, laws, or the rights of others. It is the dominant force in an industry group. This idiom is likely rooted in the children’s riddle:

               Q: Where does an 800-pound gorilla sit (or sleep)? 

               A: Wherever it wants to.

It has been a literary reference since at least the 1950s and it is often used in political cartoons to demonstrate giant issues that our leaders are ignoring, as you can see in the cartoons below from 2009 and 2021.


Source: The Gainesville Sun

Source: The Week

Today we have a different type of 800-pound investment and economic gorilla to deal with. It comes from a small handful of companies whose stocks are leading the market in an extraordinary and disproportionate way. While the stock market as measured by the S&P 500 index has increased approximately 10% year to date as I write this in early June, only a few stocks from that index have driven almost all the return.

The investment and Economic Research firm InvesTech, which has been around since the early 80s and to whose newsletter we subscribe, created a Gorilla Stock Index consisting of 10 companies that have led the stock market since the pandemic lows of 2020. These stocks are generally tied to the technology, communications, and consumer discretionary industries. The index is meant to show concentrated risk in today’s stock market.

As you can see in our chart below through the first three weeks of May, the Gorilla Index of these ten stocks was up in excess of 38% YTD. As of the time the chart was created, the S&P 500 index was up approximately 9% YTD. However, the “other 490” stocks in the index were up less than 1%.

From a historical standpoint, having so much of an index tied up in just a few stocks is not healthy. It shows that people are flocking en masse to just a few ideas. This often leads to periods of what former Federal Reserve Bank Chairman Alan Greenspan called “irrational exuberance”. We now see that the top ten companies of the S&P 500 make up more than 32% of the index. This is a very high level of concentration, and we know that healthy stock market performance is generally broad-based.

Source: RealInvestmentAdvice

After falling 26% from early January to mid-October last year, the S&P 500 has rebounded nearly 20% off the bottom. Liz Ann Sonders and the economic team at Charles Schwab put together a historical chart that shows how that return compares to other major market bottoms since 1980. It also shows that small-cap stocks, as represented by the Russell 2000 index, generally outperform larger companies in the early part of the cycle. This is definitely not happening now.

While we know that history does not exactly repeat itself, it often rhymes. Therefore, we would be well advised to pay attention to lessons from the past. This situation will likely resolve itself in one of two ways in the coming months. Either economic growth will reaccelerate, leading to stronger corporate earnings and more broad-based participation in the stock market rally. Or growth will continue to decelerate and these few stocks that have rocketed higher will see their valuations fall back in line with the rest of the market.

We wanted to share this information to bring some context to the performance of your age and risk-based portfolios. 800-pound gorillas may be fun and interesting to watch, but generally, they are dangerous to try to ride. I have been doing this for more than 35 years and have seen this movie before. There have been other periods where the valuation of a small segment of the market has gotten ahead of itself. It is important to exhibit patience and discipline with your diversification during times such as this. The CFPs of Impel Wealth Management are here to help you with your family’s unique situation or to answer your questions. Please do not hesitate to call, we are here for you as we continue “Moving Life Forward”.

© 2023 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Investors cannot directly invest in indices.