As always, global markets are giving us plenty to talk about: interest rate hikes out of the Federal Reserve, U.S. Treasury intervention over the Japanese Central Bank, surging energy prices – oh –by the way – there is a 10% chance (allegedly) that artificial intelligence will terminate mankind within the next ten years [Anthropic]. Are you having fun yet?
Focus on the Facts:
As a portfolio manager, this is somewhat of an ideal setup across asset classes. We have higher federal funds rates, significant capital investment from governments and corporations, commodity prices are trending, and credit quality amongst the largest (recent) issuers is rock solid.
Translated: you should not be surprised if your assets are performing well. Your cash is earning approximately 4%, government and private sector spending is driving stocks higher, materials and commodities are positive net return contributors and diversifiers, and you can earn approximately 6% yields on highly rated bonds if you are willing to stomach the price swings.
Be Mindful of the Risks:
You should not expect to earn attractive returns without a commensurate level of risk. What are the risks that we see as structurally important to markets? A substantial slowdown in AI spend is top of mind for me. Between semiconductors and data center equipment providers, you can attribute a significant amount of returns to those industry groups. If spending were to abruptly slow down, I cannot imagine a positive reaction. The good news is that for the foreseeable future, that spending is most likely going to ramp up. As for other structural risks, I do not view interest rates, debt issuances (as planned), or the Treasury market as serious risks to the stock market. Escalations in Iran and surrounding countries would be the next most significant risk that comes to mind.
Dismiss Doomsday Narratives:
How would you feel if we told you that we could guarantee a 75% return in exactly one year from now? Would you believe us? Would you evaluate the credibility of the people making that claim? Would you ask for evidence? A roadmap? My guess is that you would be a little bit disgusted if we said something like that. First of all, how would we come up with that number, 75%, in the first place? Why not 63%? Or 88%? How could we put a timeline on it? Why are we telling you this in the first place? That statement should make you a skeptic at best, a cynic, more likely. I would encourage you to take that mindset with you the next time you hear your favorite podcaster make a claim that the stock market and economy will crash by X% by the date 202X or 203X. You can virtually rest assured that their incentive is to most likely sell you a book, a course, or ads through their podcast, etc., not altruism. Their agenda is not likely to cross paths with your best interests; we believe they are the opposite of a fiduciary.
Action Items:
- Mind your cash position. If you need a specified amount of cash for living expenses or projects over the next 12 -24 months, those dollars do not belong in stocks. Stick with cash and cash alternatives and collect your low-risk returns.
- Don’t be afraid to buy the dip. If you have cash to put to work, let’s make a plan for strategically buying the dip. I imagine that between midterms, scary headlines about robots and rogue AI systems, and who knows what else, we will probably have our fair share of dips to buy into.
- Consider, or better yet, seek out the counterpoint to any extreme narrative. Bullish or bearish, if someone is selling you a dream or a nightmare, get skeptical.
Please reach out to us if there is anything you would like to discuss.
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