Imagine playing a game of Jenga. 

Your tower of blocks represents the stock market. 

Each block in the tower represents a different stock. The tower is stable and balanced in a healthy market, with various blocks contributing to its structure. However, it becomes unstable if you remove blocks from the bottom and rely heavily on only a few blocks to support the entire tower. 

Similarly, when the stock market narrows and only a small percentage of stocks are responsible for driving most of the gains, it signals a huge red flag. 

It’s like reaching the summit of a mountain, but instead of a broad and sturdy peak, there’s only a narrow ledge to stand on. 

Cathie Wood, a renowned Investor, says this imbalance and concentration of market returns can be seen as a warning sign, signalling a potential hard landing and even a recession. 

It’s fascinating how we all get caught up in speculating about what might happen to the economy. I love diving into people’s comments and using their words to create a blog that speaks directly to you. 

Cathie Wood’s job is about getting as close to the truth of what will happen in the economy, Innovation and trends and then deploying capital for investors to make them stinking rich. 

So far, her performance has gone down in flames, and it’s encouraged the unforgiving internet to flood the comment section and point out how badly her investment fund Ark Innovation ETF is doing. 

It hasn’t performed well. 

An ETF (Exchange-Traded Fund) is like a basket of investments you can buy and sell on a stock exchange, just like a regular stock. Instead of investing in just one company, an ETF allows you to own a small piece of many different companies or assets. 

Everything in Wood’s investment fund are high-risk technology companies. She hopes a small percentage will deliver parabolic growth if the technology company becomes a macro trend. If it does, it’ll most likely result in generational wealth for investors. 

Her investment funds performance has been chaotic, with a recent 20% recovery after the Fed’s interest rate hikes nuked the entire market. 

Wood is firmly anticipating more economic pain and expecting a hard landing. 

She says Innovation will be a flight to safety, the opposite of how investors and others have traditionally viewed it in recent years, which was high risk. 

Wood says it’s truly fascinating to witness how the fear, uncertainty, and doubt that once surrounded debt ceilings, recessions, and banks teetering on the edge of bankruptcy have shifted sentiment around Cryptocurrency investing. 

Suddenly, Crypto has emerged as a sanctuary, a secure haven where people can find refuge amidst the chaos. 

But there are still major concerns that can wipe away generational wealth for investors. 

One major red flag you can’t miss, and it spells out economic disaster. 

The concentration and narrowing of investments are unfolding in the market, and it’s a sure sign that things are about a collapse. 

A healthy market is one where several sectors and companies, large, medium, and small, are all growing and doing well. 

Cathie Wood  

“There will be a harder landing out there in the economy than most people expect. 

The equity market has narrowed to just a few stocks, with mega-cap tech stocks accounting for 75 % of the market’s move this year. 

Narrowing tends to be, if sustained, very negative. It means we’re setting up for a bear market. We think we’re going into a hard or harder landing than most expect. 

It will be uncomfortable enough for companies that are losing pricing power and experiencing margin pressure and will force them to adopt these new technologies faster than otherwise would be the case. 

Innovation solves problems, it always does, and we believe companies will be looking at a major problem: margin degradation that they will want to protect against.” 

The Stock Market Is Showing You a Sign, and It’s Not Good. 

Cathie Wood says when a particular sector becomes heavily weighted in an index like the S&P 500, it can create a situation where the performance of that sector has a significant impact on the index as a whole. 

If technology stocks start to underperform or experience a downturn, it can drag down the overall market because they make up nearly 30% of the entire index. 

A crashing stock market reflects a decline in investor confidence. When stock prices decline, people’s wealth decreases, affecting consumer spending and confidence. Reduced consumer spending can ripple effect on businesses, leading to lower revenues and potential job cuts. 

In other words, it’s a shit show. 

Below is a chart that shows the balance of the S&P 500, along with a detailed breakdown of the top 10 companies within the index. Eight out of 10 are in the technology sector. 

Apple (AAPL): 7.70% 

Microsoft (MSFT): 6.89% 

Amazon (AMZN): 3.11% 

NVIDIA (NVDA): 2.82% 

Tesla (TSLA): 2.02% 

Alphabet Class A (GOOGL): 1.94% 

Meta (META), formerly Facebook, Class A: 1.75% 

Alphabet Class C (GOOG): 1.68% 

Berkshire Hathaway (BRK.B): 1.65% 

UnitedHealth Group (UNH): 1.18%11 

Your Crypto Can Turn From a Headwind Into a Tailwind Quickly Becoming a Flight to Safety. 

While the stock market is teetering on the edge of collapse, Wood thinks there could be a quick turnaround where companies are forced to use new technologies to reduce costs. 

It will, in turn, reduce interest rates bringing further liquidity to those investments. 

Cathie Wood  

“We have found it very interesting that Bitcoin and Crypto, in general, rallied during the Regional Bank crisis. This was undeniable proof that Crypto, especially Bitcoin and, to some extent, Ether, have become vehicles of flight to safety, much like gold. 

This realisation prompted us to contemplate the broader concept of Innovation, particularly now that AI is gaining immense significance in corporate landscapes. 

This heightened awareness means that Innovation will accelerate faster than anticipated. In this cycle, Innovation will be widely perceived as a flight to safety, which is the opposite of how investors and others have traditionally viewed it in recent years. 

Previously, they considered Innovation a problem in their portfolios when interest rates were rising, as it affected long-duration assets. 

However, if interest rates decrease, these assets transition from a headwind to a tailwind.” 

Final Thoughts. 

Wood’s perspective is clear and simple, and even though I can’t predict what will happen, I agree with her. 

When companies adopt new technologies, their costs will decrease with a knock-on effect and downward pressure on inflation and interest rates. 

The increased liquidity will be a net positive for cryptocurrency prices and technology stocks. However, we should expect more pain in the short term because there’s too much concentration. 

It’s not the first time I’ve heard this take. 

Raoul Pal has a similar thesis. 

Crypto matches the business and liquidity cycles, so cryptocurrency increases when interest rates are low and stock market performance is higher. 

The cryptocurrency market has yet to experience a recession. 

Often it does the opposite of what you think it might because you can’t forecast people’s emotions. 

Expect volatility 

And opportunities.