A market expert sees ‘a perfect storm’ brewing in Amazon, Apple and Microsoft shares⁠

The entire world will be watching the US Federal Reserve this week and how much money Jerome Powell is willing to prop up the American economy, which is expected to contract 4.6% this year, according to Goldman Sachs. The best outcome, according to ING, will be a signal that the Fed will allow US inflation to shoot over the preset 2% target.

But, there may already be inflation just not where you are looking

Aside from gold, there are a handful of stocks raking up most of the money in many markets across the world.

The combined market value of the three iconic companies, Apple, Microsoft, and Amazon, was already bigger than the entire German economy⁠— the fourth largest in the world⁠— at the start of the year. Now, they are even bigger.


“I think we actually have high inflation, but due to these side effects it is showing up in stock prices instead of consumer prices,” financial market expert John Mauldin wrote in a report on July 24.

The concentration of gains has gotten worse since the pandemic began

Mauldin pointed out that the likes of Microsoft, Apple, Amazon, Google, Netflix, and Adobe are part of ten stocks that have gained 35% or more this year, whereas the remaining 490 stocks in the S&P 500 are down 10% or more. He calls this ‘inflation’, a term that usually denotes rising in prices of consumer items.

“If the concept of reversion to the mean holds, either their sales are getting ready to explode, or their stock prices are going to fall. Or some combination,” he said.

Something similar is happening in India. The gains in Reliance Industries⁠— which is now the world’s second-largest energy company after Exxon⁠— in the last six months is over 46%. The benchmark Sensex is still in the red for the said period.

There are only 14 stocks in the benchmark Nifty50 index that are in the green for the year, the remaining 36 are in the red. Only half of those have seen gains of over 20% since the beginning of 2020, two of those are drug makers Dr Reddy’s Laboratories and Cipla. The broader indices have a lot more red than green.


What pushed so much money into so few stocks?

In a world gripped by crisis, risk aversion is the norm. Therefore, investors like to take shelter in big companies, market leaders in their own space, and well-diversified conglomerates where at least one wing makes money when many others don’t.

One of the reasons why RIL — which has businesses from oil refining to telecom to retail to now, e-commerce⁠— was able to raise over $20 billion from global investors like Facebook, Google, and Intel to name a few at the peak of the pandemic. There will be more funds raised for the retail vertical now, Asia's richest man Mukesh Ambani recently promised.

It’s not just the feeling of safety in familiarity and size

According to Mauldin, the current bull market is a kind of perfect cash flow storm.

• Legions of new investors using stimulus money to buy whatever makes them feel good
  
• Bored gamblers looking for action,
  
• Large institutions brimming with Fed liquidity
  
• Traders of all sizes, small investors to monster hedge funds, chasing momentum—a perfect witches’ brew
  

"...all in the context of ultra-low interest rates that make cash and fixed-income holdings unattractive. You could not have designed a better perfect storm in which to create a market mania, and that’s exactly what we have,” he added.

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