Ask Forstrong:
Some Perspective On Summer Storms
August 2024
Ask Forstrong: What is driving recent market declines?
It’s August and all of us should be on a tranquil beach indulging in light reading. But markets have their own mind and have no problem interrupting a perfectly uneventful vacation.
Below, we offer our insights on recent summer storms:
1. We Have Been Expecting This.
Blame the Fed. Blame last week’s soft payroll numbers. Or even blame Japanese housewives for unwinding their enormous Yen carry trades. A far simpler explanation for the selloff, anticipated in last month’s Ask Forstrong, is that the air is now coming out of the AI bubble. Up until recently, tech companies were falling over themselves telling investors that AI would boost sales and earnings. Today, the same companies readily admit the payoff will take longer. Earnings season has laid bare what should have been seen in plain sight: Big Tech has yet to see any meaningful return on investment from their AI spending binge. AI cynicism, rather than euphoria, is now the market vibe.
2. Investment Winds Are Indeed Shifting.
Over the past 18 months, global investors have rushed into the perceived safety of cash and the largest technology stocks, signaling extreme risk aversion. This was never a healthy market dynamic. Meanwhile, our central investment theme this year has been a “broadening bull market” or a “Great Rotation” as the media is now calling it. The thesis is simple: many asset classes outside of technology companies are poised for solid long-term returns (and are outperforming during this selloff). Why should this trend continue? Because the broader global economy does not face the same conditions that led to the large contraction in 2000-2002 or 2008. The cyclical upswing out of the pandemic is still in play. Investment leadership transitions are always bumpy and turbulence is normal along the way. However, portfolios need to adapt to the new regime. Many investors are now offside here.
3. Panic Never Pays.
At a time when nearly every newsfeed suggests that the world is in a bleak place, managing your own psychology remains the most crucial determinant of investment success. Above all, one must avoid the cardinal sin of investing — selling into a panic. History has shown that reacting emotionally to volatility (which is now on par with market lows in 2008 and 2020) often leads to regret and missed opportunity. A year from now, most will have forgotten about today’s fears, and markets are likely to be higher than they are today. As always, long-sighted investors who stay in the game, focusing on fundamentals rather than short-term noise, are the ones who ultimately succeed.
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