Time To Buy Small And Mid-Cap Stocks? Cathie Wood Sees Broadening Rally After Market Concentration Exceeds 1932 Great Depression Levels

The U.S. markets have been on a tear this year, carrying over the momentum from 2023, when the S&P 500 gained more than 24%. However, the peculiarity of the gains seen in the current bull cycle is the top-heaviness of the market. Ark Invest founder Cathie Wood weighed in on the pattern in the firm’s monthly market update webinar that aired on Wednesday.

Extreme Concentration: The market concentration has reached an extreme, she said, pointing to a chart comparing the market cap of the largest stock relative to the 75th percentile stock.

The chart on the same compiled by Goldman Sachs and shared by the X handle of Kobeissi Letter showed the market cap of the largest stock was 750 times the market cap of a 75th percentile stock, which refers to a stock generating better returns than 75% of the stocks. The current stock concentration was higher than what was seen during the previous peak that occurred during the 1932 Great Depression.

Wood said in the webinar that the market concentration has reached an extreme and this extreme is worse or more extreme than it was during the Great Depression in 1932. Back then the unemployment rate was 25%+ and global activity saw an absolute crash around the Smoot-Hawley tariff Act, she said, adding that the question then was which companies were going to survive, resulting in the crowding into just a few companies.

This “took that ratio to a very high level. We broke that level,” the stock picker said.

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Light At Tunnel’s End? The current scenario, according to Wood, is somewhat similar to the Great Depression days when there was a lot of disruptive innovation around the telephone, electricity and the internal combustion engine. “Today the AI theme Is front and center and the way the markets behaving is as though only a few names were really benefitting from this move,” she said.

“If we're right, the productivity gains throughout the economy are going to be astounding and they will not accrue to just a few companies; They will be very broad-based and we're still trying to figure out how much AI will be commoditized how much will we be looking at AI as a feature or sustained innovation and how much of it is truly disruptive innovation.”

The fund manager also underlined a positive offshoot of the Great Depression. After the peak of concentration during the Great Depression, the market rose 62% over the next three to four years. The gains were disproportionately favoring the smaller and mid-cap stocks as opposed to the “mega-cap cash fortresses,” she said.

The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund, that tracks the performance of the S&P 500 Index ended Thursday’s session up 0.16% at $546.37, according to Benzinga Pro data. The ETF has gained about 16% this year compared to a more modest 1.2% gain for the iShares Russell 2000 ETF IWM.

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