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‘AI’ Trumps the Fed, Inflation and the Economy
The Artificial Intelligence (AI) narrative continues to dominate sentiment. Whether it was Google, Meta or Microsoft… the (AI) earnings script was similar. Mega-cap tech companies so far have reported impressive earnings and revenue growth with respect to their AI strategies (across online ads, cloud and search). It was music to investor’s ears. However, strength in tech earnings isn’t necessary conflating to strength elsewhere. To that end, there is a strong bifurcation with earnings… and that raises some questions.
Risk vs Reward
Warren Buffett once told us “the stock market is a device for transferring money from the impatient to the patient”. Which one are you? And while it sounds cliché, the power of patience is real. We need patience for two things: (i) allow our existing investments to work over time; and also (b) if buying, waiting for prices to come to us (eliminating FOMO). For example, some investors may have felt left out the past three months (I certainly did) – as ‘hot’ momentum stocks like Nvidia, Netflix, Meta and others surged. Fundamentals were not front of mind – where investors thought nothing of paying 40x plus earnings. The momentum trade had taken hold. But as we know – things inevitably revert to the mean.
Things Looking Better – But More to Do
For 23 straight weeks (from late October) – the market has effectively gone straight up. It added ~$12T in market cap with barely a pause – a rally for the ages. Now for ten of those weeks, it was in overbought territory – where the (weekly) Relative Strength Index (RSI) traded above 70. I cautioned readers of a likely (technical) correction. And whilst I stressed the market can remain overbought for several weeks (and it did) – it’s also an area to be cautious. This is where sell-offs start. And it seems we could be seeing the start of a 7-10% correction… however it’s still early.
When Is the Right Time to Buy Bonds?
Treasury yields are surging… the U.S., 10-year treasury – a rate which every financial asset is tied to – has ripped back above 4.60%. Credit card rates, home loans, auto loans… you name it… have all increased. The last time UY.S. 10-year yields traded above 4.60% – the S&P 500 was ~20% lower. From mine, the divergence is a head-scratcher… however, what I can say is risk assets have a tougher time advancing when yields push beyond this zone. The question is – is now a good time to increase bond exposure? I think the answer is yes.. and here’s why