Too Much Concentration

by | Jun 4, 2024

In yesterday’s Morning Monster, Jeffry added a few more sticks to the fire of red flags that keep popping up showing that the economy might not be on the stable footing that it appears to be on.

First up, Jeffry talked about “market breadth”, which is just a fancy way of saying how many stocks are joining in the market rally.

Normally, you want to see a lot of stocks moving up together, because that’s a sign of a healthy market. But lately — as in over the last 9 years — we’ve the opposite.

The market’s rallying, but fewer and fewer stocks are driving those gains. This kind of concentration is a red flag. We’ve seen similar patterns before past financial crises, and it’s something we can’t ignore.

But this theme of concentration isn’t just about stocks. It’s also hitting the banking system hard.

Right now, there are $517 billion in unrealized losses weighing down the banks, and 63 lenders are teetering on the edge of insolvency. This isn’t spread out; it’s concentrated in specific financial institutions.

And here’s the kicker — it’s been going on for nine straight quarters since the Fed started jacking up interest rates. That’s a long time for these banks to be under this kind of stress.

Next up, the “Magnificent 7” stocks. As those big tech stocks have continued climbing higher, they now make up 31% of the S&P 500’s market cap.

It means just a handful of stocks are driving a big chunk of the market’s performance. If anything happens to these stocks, it could send ripples through the entire market. This kind of concentration makes the market more vulnerable.

Historical Parallels

We’ve seen this movie before. Think back to the Dot-Com Bust (2000) and the Great Financial Crisis (2008). In both cases, a handful of high-flying stocks were leading the charge, and when they stumbled, the market took a big hit.

The current situation has some eerie similarities, with a few strong performers popping up the market.

Get Jeffry’s full insights on Monday’s Morning Monster right at the top of the show.

— The Jeffry Turnmire Trading Team


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