Is the market healthier than you think?

Taking a different look at stocks [Click to view in browser](. Earnings central - [Under Armour (UAA)]( - Under Armour crushed estimates on the top and bottom line while raising full year guidance. - [Clorox (CLX)]( - As lockdowns ease, consumers bought fewer cleaning products. Consequently, Clorox missed on the top and bottom line while lowering its full-year outlook. The company expects fiscal ‘22 sales to decline by 2%-6%. - [Eli Lilly (LLY)]( - Pandemic sales came in short as Eli Lilly came in 2c shy of the $1.87 EPS forecast while revenue beat estimates. - [Alibaba (BABA)]( - Jack Ma’s behemoth reported revenue growth of 34% that fell short of estimates while earnings managed to top estimates. The company faces an uncertain future amidst the crackdown on tech from the Chinese government. - [Take-Two Interactive (TTWO)]( - Release delays for the gaming company led to a weaker-than-expected forecast, overshadowing their beat on both the top and bottom lines. --------------------------------------------------------------- Invest in Digital Currencies with ease Access the world’s top digital currencies and build your crypto portfolio. Trade $1,000 and get a BONUS $50 for a limited time. [Click here to learn more]( Sponsored --------------------------------------------------------------- Market moving stories you missed: - [Landlords, Tenants Fill Courts As Eviction Moratorium Ends]( - [Shares Of Tencent Fall 10% As Chinese Government Targets Online Gaming]( - [Russia Boosts July Oil Production As OPEC+ Allies Pump More]( - [Tencent (TCEHY) Falls Sharply as State Media Describes Online Games as ‘Spiritual Opium’, Company Vows to Improve]( --------------------------------------------------------------- Key economic data highlights: - [CoreLogic: House Prices up 17.2% Year-over-year in June]( - [U.S. Manufacturing Softened In July Due To Supply Bottlenecks]( - [Construction Spending increased 0.1% in June]( - [Housing Inventory August 2nd Update: Inventory Increased Slightly Week-over-week, Up 33% from Low in early April]( --------------------------------------------------------------- Investment viewpoints: - [5 Stocks Reddit’s WallStreetBets is Buying Before Earnings]( - [Rising Tide Lifts All COVID Boats]( - [Why Don't Billionaires Pay the Same High Tax Rates the Rest of Us Pay?]( - [Thinking About Buying Stock In Bank Of America, General Electric or Beyond Meat?]( --------------------------------------------------------------- Is the market healthier than you think? - 5 companies drive most of the S&P 500 and the Nasdaq 100 - This reduces the effectiveness of diversification - The S&P 500 equal-weighted index finally hit new highs - The Russell 2000 continues sideways - Inflation and the Fed dictate the future for stocks and bonds 5 companies make up 22.5% of the S&P 500 and over 40% of the Nasdaq 100: - Apple (AAPL) - Microsoft (MSFT) - Google (GOOGL) - Amazon (AMZN) - Facebook (FB) The extraordinary index weight of these companies explains why index funds outperformed active stock picking funds this year. Our entire rally, bought and paid for by the Fed, poured money into relatively ‘safe’ investments with high growth. And that’s a problem for our market. Yet, there are signs brewing of a broader rally. Destroying diversification Diversification lets investors spread their risk out amongst many different companies. This designs a portfolio where no one stock has an outsized impact, good or bad. Under normal conditions, market indexes function the same way. Now, our markets lean too much into a few companies, many of which operate in the same sector. That creates company-specific and sector-specific risk. Here’s a good example. Let’s say congress comes together and hands out anti-trust violations to Google, Amazon, and Facebook. Bad news for these companies could send shares plummeting. The basic math goes like this. If all three of these companies drop 10%, it would knock off 1.1% of the S&P 500 and 2.0% of the Nasdaq 100, assuming nothing else changes. In reality, we often see similar stocks trade ‘in sympathy’ to the ones hit. Measuring market health Two indexes do a good job of measuring the broader market health. First is the S&P 500 equal-weighted index. This index, measured by the RSP ETF, gives each company in the S&P 500 a 0.2% weight. Since the start of May, the index failed to make new highs...until yesterday. The RSP finally made new all-time highs. That’s a big deal because it means an array of companies pushed higher. A second index to watch is the Russell 2000 ETF IWM. The 2000 small cap stocks the index follows typically rally during economic expansions. Yet, this index has failed to follow all the other major indices higher. It’s a troubling pattern, but one that existed before the pandemic. In fact, the IWM never moved past its 2018 highs until late last year. Our hot take To say the outlook for equities and treasuries is murky understates the situation. We continue to see a rotation from one sector to the next month after month. Few disagree that on the whole, equities and treasuries are overpriced. Yet, the momentum driven by central bank liquidity means that no clear investment alternatives exist. Think of it this way. Back in 2018, you could invest in U.S. 10-year treasuries for +3% return. Back in 2006, you could get over 5%. As long as the Fed artificially inflates the price of treasuries, markets will follow suit. That’s why inflationary pressures are so important. They’re the one ingredient that could force the Fed’s interest rate hand. To ensure delivery of all emails, [whitelist us](. You are subscribed to email updates from [InvestingChannel](. To stop receiving these emails, you may [unsubscribe]( now. InvestingChannel, Inc., P.O. Box 118 New York, NY 10018. Disclaimer: This is not investment advice. This InvestingChannel, Inc. newsletter is for information purposes only and opinion-based. 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