AI Helping Markets Increase

Volatility is not an easy thing to live through, but investors must think of it as part of the price they have to pay for the benefit of long-term equity returns.  We all want the stock markets to advance, but reality reminds us that the markets can’t go up all the time.  Thus, when uncertainty grows it’s only natural for investors to manage risk by being quicker to reduce their equity exposure.

We expect the volatility to continue because there are unanswered questions.  When is the Fed going to cut interest rates?  Digging deeper, will the inflation outlook improve enough for the central bank to feel “confident” in their decision and avoid a policy reversal?  In the meantime, will Treasury yields settle down toward the levels we saw earlier this year. 

As long as these questions remain, we can expect the equity and bond markets to stay unsettled.   But the intermediate-term effect (say 3-6 months) on investors will be palpable if the next move by the Fed is a cut and not a hike.

The Federal Reserve Open Market Committee has more weapons in their arsenal then just the fed funds rate.  An important one is their messaging.  We’ve seen this recently as prominent members have dealt with “lack of further progress” on inflation in the early month of this year.  Instead of raising the fed funds rate, and likely causing a huge negative reaction in the stock and bond markets, the Fed let their words do the work for them. 

We’ve recently talked about four important themes that have been helping to move the stock markets forward since last fall.  In no particular order those are tech stock strength (including Artificial Intelligence or AI), falling inflation, solid growth, and expectations of a Fed cut.

AI has really been "the talk of the town" as of late lead by chip make NVIDIA in helping many big companies to profit off of the thing - artificial intelligence.  

Although there been a few dings in these elements over the last couple of months, they haven’t really changed.  And because of that there is no significant worry, in our view, of a major decline in the markets currently. 

Investors are looking to thread a needle.  They want enough economic slowing to allow the Fed to cut interest rates, but not enough to result in a recession