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We can collectively put the bottle of Tums away as the President signed the debt limit bill to avoid a US default with just two days to spare. However, my friends and family in the Northeast had to pull out the n95 masks for a few days as smog poured in from Canadian wildfires.
Like my father always says, “never a dull moment.”
I’m a New Yorker at heart and I can’t hide the envy as the Heat made it to the NBA Finals, the Panthers are in the Stanley Cup and Lionel Messi signed to play for the Inter Miami MLS team. It feels as if my neighbors are throwing a party every night, but my invite got lost in the mail. My loyalty to my sports teams is unwavering and I would never let FOMO permit me to jump on a bandwagon.
Which is something investors should avoid in the equity markets as well.
The technology trade is back in full force with the sector up 34% on the year. The elephant in the room is that 6 or 7 stocks are responsible for all the gains. US Large Cap Growth is made up of 45% technology companies and has a current valuation 134% of its 20-year historical average. The technology sector alone is trading at a 45% premium to 20-year averages.
Apple, up +40% ytd, just came out with Vision Pro. Which is essentially $3500 ski goggles that allow you to experience mixed-reality and go anywhere in the world in 3-D and 4k. It immediately made me think of Joaquin Phoenix’s character in the movie Her. I will take a strong pass on that. But with AI, Chat GPT, and robots, it seems less harmless than entering the plot of Ex Machina or I, Robot.
A literal quote from Elon Musk: “AI would be the biggest event in human history. Unfortunately, it might also be the last.” A bit dramatic but it certainly makes you think, especially with demand exploding for AI chips used for Large-Language Models. Nvidia is up 165% on the year and briefly joined the short list of companies with $1 trillion in market cap.
While the artificial intelligence frenzy may be a megatrend, in these early innings it gives flashes of the dotcom bubble, 2008 and recently crypto. I’m not saying this is the same thing, but we shouldn’t pile into AI without caution.
We should strive to make money safely and efficiently and not just invest for our own individual excitement. It’s not a craps table. Making an investment due to FOMO has major disadvantages. Remember, if you lose 50% of an investment you need to make 100% to get back to even. That is an expensive proposition for a dopamine hit.
The Nasdaq index hit 5000 during the dotcom bubble in 2000 and took 15 years to reach that level again. I know families that bought houses in 2007, right before the crash, and sold them at the same price they purchased them for in 2022. That’s another 15 years. Bitcoin first hit $60,000 in early 2021 and it now sits at $26,000, 60% off the highs. There are plenty of coins and crypto exchanges that went completely belly up during that two-year stretch. I say this because I’ve seen it happen to hard working individuals who work for the railroad, nurses, teachers, policemen, etc. Jumping into the new craze and attempting to get rich quickly so they can ditch a second job or retire early. This rarely works because even if you get it right you must deal with the emotional decision of cashing in your chips.
A few AI and robotics ETFs exist, and they come with tremendous volatility. In 2022, several of the ETFs had drawdowns of over 50% and almost all of them finished the year down over 40%. The other thing to be careful of when investing in the space is that, similar to slapping “.com” on a company during the dotcom bubble or even the “ESG” title in the last 7 years, you will see companies claiming AI or putting it in their name in hopes of driving investment, revenue and relevance. Over the years, funds that saw millions in outflows because of poor performance, tacked environmental social governance (ESG) onto their strategy names in hopes to gain popularity and save themselves. A phenomenon known as greenwashing. Be wary of the crypto wolves dressed in AI clothing. There are droves of crypto enthusiasts that have now pivoted to AI endeavors, another landmark in their digital goldrush.
That’s why we leverage several active managers in our asset allocations because they spend their entire day sifting through the universe of stocks and are able to navigate certain AI investments and the picks and shovels which include chips, cloud computing and cyber security. This is a much more thoughtful approach than taking a flyer on a risky stock because it seemingly has AI exposure.
There’s so much uncertainty in the markets given persistent inflation, the Fed increasing rates, slow growth, regional bank worries and geopolitical tension with most economists predicting a modest recession within the next 12 months. Private markets have outperformed public markets in the years following bear markets and most investors have little to no exposure. Fixed income investing has had a resurgence and with rates potentially coming down in the coming years, price appreciation could be added to principal and interest. We also like a global life sciences fund that invests in companies focused on unmet medical needs. Over the next 10 years the population over 65 years old is due to increase by 30%. As the population gets older it will spend more on maintaining their wellbeing. Also, the pandemic has increased awareness of the importance of healthcare to national security.
So don’t let emotions take over when investing and be careful not to jump on the bandwagon trade because you’re scared of missing out.
Disclosures
This information is provided for informational purposes only and does not contain investment advice or an offer or recommendation of securities. Connectus Wealth, LLC d/b/a Connectus Private is an SEC registered investment adviser. Investment does not imply government endorsement or that the adviser has attained a level of skill or training.