“Successful investing is about managing risk, not avoiding it” – Benjamin Graham
The S&P 500 recently saw a 9-week winning streak snapped in rather dramatic fashion with a solid sell-off dragging indexes down sharply, including a -4.5% drop on Friday 6/5 for the Nasdaq. This has brought the bear market voices to the forefront, as questions about if this is the top of the AI bubble are once again circulating loudly. We are not agnostic to the very high valuations and rapid movement of semiconductor stocks, specifically memory stocks, and the narrow rally since the war started. In Q1, it was about value stocks and a broad rally with the equal weight index outperforming the S&P as tech waivered; however, since March 31st, the Nasdaq outperformed the Russell 1000 Value by 14%, a huge differential in return depending on sector allocation.
What does this mean for markets going forward? It is prudent to be wary since there are some red flags popping up, however we remain bullish on the rest of the year, even if we expect some chop and downside in the near term as markets absorb mega IPOs from SpaceX and Anthropic. No market goes straight up forever, gravity does affect all assets eventually, but we argue pullbacks remain buyable and are more of a dip/correction and not the start of a mega bear.
Newton’s First Law of Inertia states that an object in motion stays in motion unless acted upon by an external force. We think this applies well to markets right now – that the bull market and uptrend remain the bull market and uptrend unless acted upon by an external event. What might cause the end of the bull? Policy error is a classic bull market killer, or perhaps a recession or rapid rate hike due to accelerating inflation. Dark horse risk would be AI fizzling out and all this investment and hype being for naught, but we see that as lower probability. AI will unfold in ways we have not yet imagined (technology and change tends to be lumpy and abrupt) and not every winning stock right now will remain in leadership. We always remind people that Blockbuster was untouchable until Netflix changed the game. Yahoo famously could have bought Google for a paltry $1 Billion in 1998 and passed AGAIN on it for $3B in 2002. Apple wasn’t the first to make a smart phone and Blackberry ruled the corporate world for years. So, while we remain bullish, we are also aware that we need to keep allocations in check, pull back on gains and remain more balanced. Don’t allow hype and FOMO to drive your investment portfolio into unacceptable risk levels, or over concentrate in current winners.