Juggling Dynamite

A worthwhile discussion in this segment…

So far this year, the top 10 stocks in the S&P 500 have accounted for more than 76% of the index’s gain. This is the 2nd most concentrated reading for the S&P in the past 20 years. The highest percentage was 79%, achieved in 2007, right before the Global Financial Crisis. Are we in a new AI-powered Tech renaissance that will continue powering the markets higher for years to come? Or are we risking a major market breakdown, putting all our hopes in a handful of companies that can’t keep growing at the meteoric rates that Wall Street is expecting? For answers, we’re fortunate today to speak with Fred Hickey, editor of the highly respected newsletter The High Tech Strategist, which Fred has been publishing since 1987.

Here is a direct video link.

As mentioned, as of this week, the five most expensive companies in the widely tracked S&P 500 index account for 27% of the basket’s price value (as shown below, courtesy of Slickcharts). This compares with an 18% concentration for the five most expensive companies at the tech top in 2000 and is nearly 2x the average 14% weight for the top 5 since 1980.

The unemployment rate and bankruptcies are surging. Here is a direct video link.

Canadian corporate bankruptcies are +93% year over year (shown below since 2014).

While the Canadian stock market has gone nowhere since November 2021…

Twelve years of continuous central bank interventions (2010 to 2022) helped to sustain near-zero interest rates, which increasingly starved capital of conventional investment income/yield—the long-standing engine of compound returns.

The finance sector capitalized on the yield void by offering high-fee products that touted elevated returns and on-demand liquidity. Many retail and institutional capital allocators took the bait. Now, some are stuck as a cash crunch spreads. See Pensions piled into private equity. Now they can’t get out:

U.S. companies and states handed over control of some worker retirement savings. In exchange, they got a promise of high returns after a decade—and often received healthy cash payouts in the years before that.

Now the honeymoon is over. The payouts have dried up, creating an expensive problem for investment managers overseeing the savings of workers retired from big corporations and state and city governments.

Nearly half of the private-equity investors surveyed by the investment firm Coller Capital earlier this year said they had money tied up in so-called zombie funds—private-equity funds that didn’t pay out on the expected timetable, leaving investors in limbo.

Some funds and pensions are selling assets cheaply or taking out loans to raise cash needed for distributions. Firesales tend to be contagious when excess leverage is forcibly unwound.