Market Capitalization

There is an old idea on Wall Street that any sustained rallies must see participation from the financials. I have heard this idea thrown around a lot recently and it got me thinking. I know that from a fundamental standpoint, the financials need to stop falling. The financials are main cause of the current recession and for our economy to recover credit needs to start flowing. Banks need to stop failing and confidence needs to return to the sector.

With that said, I disagree that financials need to participate for the market to rally...somewhat. The financials have always been an important part of the market simply by the fact that they were a big part of the market. That is not the case anymore. Everyone knows the financials have fallen the hardest, so I decided to take a look at the data. Below are the market caps of the S&P 500, broken down by sector. As you can see the financials just aren't what they once were.

I'm not tying to say that the financials don't matter anymore, because they do. They simply don't "count" as much as they used to. Their market cap is half what it was a few years ago, so they are going to have half the effect on the S&P 500. I haven't taken a look at any broader indices, but I'm guessing the picture would be the same.

I think it's plausible that we could get a rally in the market while the financials lag. Even if they stay neutral, we could have have the other 90% of the market rallying. I'm not predicting we will be getting a rally anytime soon, but simply our market structure is much different than it was even a few years ago.