The relationship between mega-cap stocks and all the others has been relatively tight—about 8% between the 1980 high concentration of 25.5% and the 2014 low of 17.5%. Credit the tendency for a rising economic tide to lift all boats. As employment increases, wages rise and consumer spending improves, all publicly traded companies tend to benefit.

What makes 2020 so unique is the externality of the pandemic and societal-wide lockdown. The economic impact hasn’t been evenly distributed. Large international tech companies essential to remote office work and people stuck in their houses have thrived. Add to that how much better the rest of the world has managed its response to the pandemic versus the U.S.’s bungled response. One would be hard pressed to find another era when circumstances led these two groups of companies to diverge as much as they have of late. 

Consider another example of a non-economic externality parallel to the current Covid-19 circumstances: the Tōhoku earthquake and tsunami that damaged the Fukushima Daiichi nuclear reactors. Japan’s Nikkei 225 index fell 17.5% in the three trading days after the disaster hit, but the decline wasn’t evenly distributed. Sectors such as basic materials, apparel, machinery, retail and wholesalers were impacted very differently than those that suffered structural damage or disruption from the earthquake and meltdown.

But even that enormous event is nothing compared with this global pandemic. The economic impact of worldwide lockdown and re-opening has created a winner-take-all scenario, with a handful of companies capturing nearly all of the economic gains. 

Eventually, an effective vaccine will be created than can treat Covid-19. When that happens, will the lockdown advantages of the giant tech companies and their shares reallocate back to other companies? Or, did the externality create a permanent advantage to the clever mammals which can use circumstances to supplant the bigger, less adaptable dinosaurs?

Regardless, neither mean reversion nor paradigm shift means that index funds represent a concentrated risk. They will go up and down with the market, just as they always have. 

This article was provided by Bloomberg.

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