It’s a minefield out there.
It seems like every day another pocket of the market blows up. One day, it’s silver, the next, wealth management stocks. Or private equity stocks, IT consulting, software, legal services, data analytics, financial exchanges, insurance, consulting, engineering, commercial real estate and on and on. Nothing in the service economy is safe.
It’s a brave new world and the markets are in a state of wild upheaval to try to recalibrate the future. Just as the international trade order is being dismantled, the old order of the financial markets is unravelling as well. It’s heady stuff. Dangerous, too.
For the type of investor who trades in individual stocks, or even sectors and themes, this is a perilous moment. Your top pick could be the next casualty of the artificial-intelligence revolution.
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Just look at Shopify Inc. SHOP-T Plenty of analysts think it will be a beneficiary of AI, in which the company is investing heavily. Plus, Shopify posted record quarterly revenue and a 30-per-cent increase in net income just this past Wednesday. But even that couldn’t stop the stock’s nosedive, which is down by nearly 35 per cent in the past month over fears that AI agents could cut into the company’s business.
Funny thing is, index investors may not have even noticed anything crazy is going on. If you have the type of portfolio rooted in broad stock market indexes, you’ve done just fine. Over the past two weeks, as chaos has engulfed the burgeoning roster of AI losers, Canadian stocks have been flat.
International equities, meanwhile, continue ripping higher. And the S&P 500 Index of U.S. blue chips is just a shade off a record high.
Perhaps the best defence right now is a basic diversified portfolio. As far as advice goes, that’s not going to quicken anyone’s pulse. In an era when the foundations of a potentially world-changing technology are being set, diversification is as plain vanilla as it gets.
But good luck picking the winners in all of this. There will probably be relatively few of them.
“If AI is the most important technology ever, a narrow group of winners take all and they can trade to infinity,” Brent Donnelly, president of New York-based research firm Spectra Markets, wrote in a recent newsletter.
“That’s the bet the market is making on Google right now, though it’s worth saying that the market was making the exact opposite bet on Google less than two years ago.”
Just last spring, in fact, Google-parent Alphabet Inc. GOOGL-Q was among the disrupted rather than the disruptors. Since AI is reshaping how people navigate the internet, Google’s core search business looked at risk. Its share price declined by 30 per cent in two months.
If you’re feeling especially bullish on AI, maybe you cast your lot with the Magnificent Seven stocks. But this group has been declining since last October. Fears of an AI overspend have weighed heavy on Amazon.com Inc. AMZN-Q and Microsoft Corp. MSFT-Q, which are expected to spend around US$300-billion on capital expenditures combined this year.
How about betting on the broader tech sector? This is a tech boom after all. Wrong again. Because of the recent carnage in the software space, the S&P 500 IT sector is about 10 per cent off its October high. The Canadian version of that index is down by more than 30 per cent.
Suppose you went in the other direction, and loaded up on defence. Mixed results on that front. Bonds have held up well. Some defensive stocks, such as consumer staples, have strengthened, while others, such as utilities, haven’t done so well.
Other traditional havens have offered little safety at all. The U.S. dollar continues to slide and is now at a four-year low. Gold has fluctuated violently after a historic run-up, while silver prices were brutalized by a one-day crash of nearly 30 per cent.
Bitcoin deserves a mention. While it’s laughable to call it a haven, it has in the past been regarded as a hedge against market volatility. But it, too, has blown up, having lost nearly half of its value since October.
Investing savants can surely find value in the wreckage. You don’t get wild swings like these without there being lots of overcorrection. Entire sectors are being rejected from one day to the next.
Where does that leave everyday investors? Retreat to cash in case it all comes crashing down?
Or maybe you don’t do anything drastic. Get a little more defensive. Make sure you’re not too exposed to risky assets. And diversify.
Yes, it’s boring. But couldn’t you use a little “boring” these days?