Deconstructing a Narrow Market

Why May 2023 was different from most months.

For much of the last decade, we have witnessed periods where US equities have persistently outperformed global equities, and UK equities by even more.

Although the US market is often seen to be more diverse than the UK, there have been periods during this time-frame when it, too, had become increasingly narrow, relying on a few well-known tech companies to drive most of its returns.

May 2023 was rather unique.  While UK and European markets were weak in the face of rising inflationary pressures and renewed concerns over the likely path of interest rate hikes, the US was mostly flat.  The FTSE100 fell -5.4%; the S&P500 eked out a modest +0.2% gain.

Within the US market, the distribution of returns was even greater. If you had invested in US small caps (e.g. Russell 2000), you would have suffered a decline of -1.1%.  Meanwhile, the Nasdaq soared 5.8%, and the Nasdaq 100 was even stronger at 7.6%.  Why?

There was a lot of investor exuberance over AI and this helped contribute to a 36% surge in the share price of Nvidia, which is at the forefront of chip development for AI. As the chart shows, the market cap of Nvidia rose by an incredible U$248bn, which is significantly more than the U$166bn decline of the entire FTSE100.

Put another way, had Nvidia been based in Cambridge instead of California, the FTSE100 would have been up 3% rather than the sharp decline that it actually suffered.