An Investor’s Perspective on AI Hype
Doug Walters
The hype around artificial intelligence is being felt by investors in the stock market. We take a moment to provide some perspective and advice at a time when expectations are running high.
Contributed by Doug Walters , David Lemire , Max Berkovich , Eh Ka Paw
It’s hard to pick up your phone, listen to a podcast, or read your favorite investing newsletter (wink, wink) without the topic of artificial intelligence rearing its head. And rightfully so. AI is a big deal. We have seen the impact in the investment world, with this week no exception as chipmaker NVIDIA made more headlines. Today, we’ll try to put some of this in perspective for investors.
Perhaps not since the advent of the internet, and more specifically Web 2.0, has a technology had the ability to fundamentally change so many aspects of how we work and interact. The potential of AI is simultaneously exciting and terrifying. The stock market, or more accurately, investors, are collectively attempting to evaluate what this means for company valuations on a daily basis. The implications for NVIDIA (discussed in our Headline of the Week) are clear.
ChatGPT, the public face of AI to many, was launched in November 2022. Since then, the S&P 500 has returned over 27% to investors. So, is the market getting ahead of itself? NVIDIA’s stock is up over 365% in that timeframe, surpassing Amazon’s market cap. If history is any guide, the market will eventually get ahead of itself, but there’s no reason to believe we are already there.
Whether it was housing in 2007, profitless dot-com stocks in 2000, or tulips in the 1630s, markets have a tendency to overshoot. However, trying to time this overshoot with your investments is a risky endeavor that we do not recommend. As we discussed in our market timing white paper, during the dot-com bubble, then Fed Chairman Alan Greenspan famously declared “irrational exuberance” in the stock market. Often forgotten is that he said this in 1996! Over the next three and a half years, stocks rose another 116%!
Are we in 1996 right now? 1999? Or only 1991? To know requires the ability to predict the future. If your investment strategy requires that, you are in for some disappointment. Our recommendation is to stick with what you know today. AI is a big opportunity, and the road ahead will be rocky as it always is. Two actions to keep in mind as this story unfolds are:
- Stick with a diversified portfolio. Do not chase semiconductors or other AI-related plays through concentrated positions. They can go down as fast as they go up. We prefer ownership through Momentum funds as one piece of a well-diversified portfolio.
- Practice opportunistic rebalancing. Give your winners room to run and losers time to recover, but if they fall too far out of bounds (we use a 20% corridor), be ready to rebalance. That way, you can systematically sell high and buy low, which will help you manage risk over time.
These are fascinating times! As the AI story unfolds, we will continue to evaluate the risks and opportunities presented to investors and follow the evidence wherever it leads.
Headline of the Week
2 Trillion – A Magnificent One Just Got More Magnificent
NVIDIA earnings announcements have taken on outsized importance over the past year. With each upcoming report, the anticipation and anxiety increase. Thus far, NVIDIA has not disappointed. This week’s numbers were truly exceptional. NVIDIA is a clear winner in this phase of the artificial intelligence (AI) craze.
However, some of the most dangerous words in finance are “this time is different,” so caution is warranted when comparisons to the internet bubble are brushed aside. Yes, this time, the companies leading the way are financially strong and producing significant earnings growth. Still, at some point, the value realization from this craze should spread if we are entering a new paradigm. In other words, how do economies leverage these tools to provide value to the economy as a whole? We arguably are moving onto that part of the curve, but it is early.
The Week Ahead
The week’s main event should be the inflation report on Thursday, but Ukraine will be dominating news coverage this weekend.
Eagerly Awaited
After a stronger-than-anticipated inflation reading from the Consumer and Producer Price Indices earlier in the month, the Personal Consumption Expenditures Index (PCE) will bat clean up before we start looking at February’s data.
- PCE is the preferred inflation gauge for the Federal Reserve, so investors tend to focus on this one more.
- Expectations have been bumped up after surprisingly sticky readings from the other measures.
- The headline number is expected to be a 2.4% increase for the year. However, the core figure, which excludes food and energy, is expected to be a bit higher at 2.8%.
- The monthly inflation is expected to be 0.3%.
Data Flow
On the calendar for next week, there is a reading of the 4th quarter gross domestic product (GDP), the Institute of Supply Management’s (ISM) Purchasing Manager’s Index (PMI) manufacturing survey, durable goods orders, building permits, new home sales, and consumer confidence index.
- The PMI manufacturing index has been hovering below 50 for over a year but has started to move up a bit; a reading above 50 would be expansionary.
- An initial reading of the GDP was an expansion of the economy by 3.3% in the quarter, and the second revision is expected to verify that number.
War Toll
Saturday will mark the 2nd anniversary of Russia’s invasion of Ukraine.
- Damage to Ukraine is tremendous, with estimates from the World Bank/United Nations/European Union quoting a 10-year price tag of rebuilding Ukraine at $486 Billion.
- Unfortunately, Russia has grown its economy during the past two years despite being cut off from the West due to willing trade partners in China and India.
- The anniversary date will serve as a backdrop for the high-stakes effort by Democrats to get House Republicans to advance the $95.3 billion foreign aid bill that passed the U.S. Senate.
Also, going into the weekend, the U.S. dropped additional sanctions (reportedly over 500) on Russia as a response to the death of opposition leader Alexei Navalny in a Russian prison.
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