NASDAQ 100 re-balance

The NASDAQ 100 is an index of the biggest 100 companies traded on the NASDAQ. It is a popular index for investors looking for technology company exposure, given its almost 60% weighting in the index. It is easily investible via ETFs such as the Invesco QQQ (the Qs). The index is market-weighted, meaning the larger a company's market capitalization, the larger its weighting in the index. Given the widely discussed outperformance of a handful of technology companies, the index has become very concentrated in those names (namely: MSFT, AAPL, NVDA, AMZN, META, TSLA, GOOGL.) After the close of business today, NASDAQ will be doing a special re-balance of the index only for a second time in its history. The goal is to reduce some of the concentration of the largest companies.

• Collectively, the companies cited above represent 55% of the index today
• We have written before that the popularity of passive index investing becomes counterproductive at some point
• The original idea of passive index investing was to provide cheap exposure to a diversified index of stocks
• Given the market-weighted nature of popular indices such as the Nasdaq 100 and the S&P 500, they have become very concentrated over the last decade in the very large technology companies
• Most people do not understand that when they are just “passive investing,” they have a majority of their capital in a small handful of big technology companies

FedNow launches

Despite all of the technological progress made over the recent decades, the movement of money in the US is still stuck in the 1980s. It could take 2-7 BUSINESS days for you to move money between 2 financial institutions. Given the digitization of financial services over the last decade, the Federal Reserve has been working on an updated service to allow financial institutions to instantly move money 24/7, 365 days a year for their customers. FedNow launched this week with a small group of early adopter financial institutions on the network.

• This is a pretty important development for the US economy
• The ability to instantly move money any time and day of the week is very useful for businesses and consumers, and the broad adoption of this should increase productivity
• The advent of crypto-graphic blockchain technology, Bitcoin, over a decade ago was partially to address the slow-moving nature of our payment rails
• FedNow, however, does not address the other use case of Bitcoin, which is its censorship resistance given its decentralized nature
• The issue some will have with FedNow is that the Fed controls the network, theoretically giving them the ability to block certain transactions (e.g., cannabis businesses)
• While this is currently done via regulations of the banks, having the control move directly to the Fed does present some potential liberty rights issues

Regional bank earnings better than feared

Many bearish investors have been expecting the worst from regional banks. The argument was that regional banks would have deposit loss and tighten up credit, adversely impacting the economy. This week many regional banks reported earnings. The key takeaway was that deposits remain stable, with many banks showing deposit growth. Despite the good news on deposits, many banks have increased charge-offs and are likely to tighten credit. Bottom line, while risks remain within regional banks and are likely to be a grind over multiple years as they work through their credit portfolio, this week's earnings allowed investors to breathe a bit easier in the near term.

• Just four months ago, we experienced several large bank failures due to bank runs, with many worried this would spread to other regionals
• This week banks such as KeyCorp, Western Alliance, Zions, Citizens, and M&T reported stable or growing deposits
• On the better-than-expected news, the regional bank index was up nearly double digits this week
• This news helped increase investor confidence, allowing them to take more risk in small caps and certain speculative areas of the market
• Despite the good news, it's not all clear for regional banks as they are likely to be stuck with many non-performing loans as borrowers face higher financing costs
• They will also have to increase the cost of their deposit base (increasing interest paid to their customers), which will hit their profit margins

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