COVID Confirms - It is a Winner Takes All Economy

Mahmut Karayel
31 May 2020

MARKETS IN THE CORONA VIRUS CRISIS (Continued on 2020-05-31)


This week, we continue with our analysis of the markets during the Covid-19 crisis by re-examining our assumption that Wall Street and Main Street intersect. Or, do they each run parallel to each other in their own universe, never having to face each other?

Please travel through this quick thought experiment with me:

  • When we say "the market" we mean the US companies in the S&P 500 index.
  • Out of the almost 5000 listed companies in the US equity markets, the S&P 500 members make more than 80% of the market value.
  • The largest 5 companies (the mere 1% in number) make up 24% of the market cap of S&P 500
  • The largest 5 are Microsoft, Apple, Amazon, Google, and Facebook, all hi-tech companies.

Russell 3000 Companies by Market Cap

Russell 3000 Companies by Market Cap
  • Key employees of all of these companies are location independent; they are in the cloud somewhere. And soon, 100% of Amazon warehouses will be run by robots.
  • These five companies have about 1.3 million employees worldwide. About 60% of these are Amazon warehouse workers.
  • Here is the disconnect: In the beginning of 2020, total US labor force was 165 million people.
  • Of these, about 6 million were looking for a job at that time.
  • Since then, more than 40 million more Americans have filed for unemployment.
  • Most of these people made less than average pay at a location dependent job (shops, restaurants, etc.) They typically have little savings.

What does this all mean? Like every self-respecting economist, I am not able to predict anything. I am somewhat better at explaining what already happened.

If we don’t count the Amazon warehouse workers, the situation we are in with regards to Wall Street vs Main Street is the following: The five large tech companies drive the stock market. These five continue to dominate the total market cap by taking advantage of their “winner takes all” scale and location independence. They employ about half a million workers with significantly above average wages. On the other hand, almost fifty million workers are seeking jobs that pay below average wages in the Main Street economy. That is a ratio of 1 high tech worker in Microsoft, Apple, Amazon, Google, and Facebook to 100 main street economy job seekers.

This ratio of 1 to 100 is not necessarily unfare or a result intentional malice. Yet, I can't imagine that it can go on for too long. There is a reason why the congress and the FED are worried, throwing another trillion at the problem every month. Money helps, but it is evident that we need a more substantial solution in the long run.

As for investors, they are justifiably betting on these giant tech companies with higher revenue per employee and less location dependence. In the wake of increasing nationalism and discontent around the world, this brings to mind another thought: Protecting our internet infrastructure and the power grid is just as important (if not more) than protecting our streets from protestors.

The graph below shows the value of a $10,000 portfolio during the two most severe downturns in the past 80 years.

Comparison of Two Black Swans

Please share your thoughts in the comments section.

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Suggested Data References in This Article