Uncertainty Abounds

Concentration risk is a commonly discussed topic within the factoring world. It's sometimes unavoidable, and that's why we diversify, diversify, and diversify.?

If we take a look at some of the most recent financial news stories, we're reminded of why we have to keep this issue front and center.

What else are we paying attention to? Let's have a look:

• According to the Q4 GDP report, annualized interest on federal debt has surpassed $1 trillion. It's projected to pass $3 trillion by Q4 2030. Smells like a debt spiral, no??
• 2.55 million jobs were generated in 2023. 636,000 (roughly a quarter) were in the government sector. History tells us that a government hiring rate above 10% signals an incoming recession.?
• Jamie Dimon says Washington faces "a global market rebellion" over record U.S. debt. Dimon says we're heading towards this cliff at 60 miles an hour and we're approaching a point of no return. A fall off the cliff could spell catastrophe for major markets and institutions.?
• The mania over AI doesn't match the hype. The Mag7 might be killing it, but to keep up with 100% growth, they'll need to consistently outperform. It's a question of sustainability. PS - so far, no announcements of AI commercials during the Super Bowl.?

But let's bring our focus back on concentration risk for a moment.

A Game of Risk

JPMorgan analysts recently issued a warning of a dot-com style concentration in US stocks. According to their research, the 10 biggest stocks in the US equity market are dominating. This situation is eerily similar to the dot-com bubble and selloff risk is at a high.?

Concentrated markets are a big risk to equity markets. For example, if you take a look at MSCI USA, the majority of the gains there were from a very limited number of stocks.?

If we see major drawdowns within the top 10, equity markets could go right down with them.

And that's not quite a hypothetical. The JPMorgan quant analysts said they do expect these market drawdowns to become a reality.?

Speaking of risk, let's not take our eyes off commercial real estate.?

New York Community Bancorp, which acquired part of the failed Signature Bank last year, just plunged a staggering 46%. The bank decided to stockpile cash to combat lending risks, including some risky acquired loans for a co-op complex and office space.?

Analysts and shareholders alike are picking their jaws up off the floor as the bank’s provision for loan losses surged to $552 million in Q4, all from just two loans. That's up from $62 million in Q3.?

Ladies and gentlemen, we may finally be seeing reality reflected in the banks.

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