Big Tech’s $800B Drop, Fed’s Balancing Act, and a Data-Driven Market Pause

Hello and welcome back to another episode of blue Chip. Now you have Daniel Dusina, chief investment officer. Matt Mondoux, senior financial advisor, and Dan Seder, managing partner. So same playbook as usual. We’ve got a few different topics that we want to dive into and explain why we think it matters.

First and foremost, we’re going to talk about some volatility that’s been experienced amongst big tech and artificial intelligence related stocks. We’ll have a brief discussion on the Federal Reserve. Have some recent updates there on the interest rate front. And then finally we’ll talk about the government shutdown. How some of the data being delayed is starting to weigh on markets and close up with some commentary on credit concerns in the US.

My missing anything. Guys, are we ready to jump into it? Let’s do it. Let’s roll. Okay, so, mentioned big tech artificial intelligence related stocks suffering some volatility. We saw specifically last week. So that would have been the week of November 3rd. You saw a fair amount of volatility, especially among those tied to artificial intelligence. Ending the week in a bit of a whipsaw fashion, closed higher on the the final day of last week.

I think that was November 7th, but not before a pretty meaningful drop. The combined market value of several linked several large artificial intelligence linked firms. Think Nvidia, meta, Oracle and others fell by roughly $800 billion in just one week. So why does this matter? Well, this is somewhat piggybacking off of a topic we’ve talked about over the last month.

It just signals that investor optimism around unlimited growth in AI is starting to be questioned, especially when you have valuations where they are and whether CapEx spending on artificial intelligence will actually yield the returns that are expected. The other reason why this matters is because if you start to get this tech drag, it can ripple into broader equity markets.

So of course, when you have these artificial intelligence cohorts underperforming, it’s no surprise to see the Nasdaq underperforming. So the last thing I’ll say is that it just raises, the question that keeps coming about is, is this AI trade cooling? Should we be shifting portfolio allocations? How much of an impact are we going to see on corporate earnings, and what’s that going to do to broader risk appetite in the US?

The only thing I would add is we don’t know, is it that I trade the quote unquote I trade is cooling. We don’t know what the future has in store. But the one thing I know is stocks don’t only move in one direction. And so you have a slight hiccup in an asset class like this or a sector like this.

And well yeah 800 billion. That’s a big number. But market cap, the valuations of these companies are through the roof. We’re talking about $4 trillion companies nowadays. And is the next company going to be 55 trillion. And so I think you got to take it, with a grain of salt. Stocks any stock, any sector doesn’t just move in one direction.

These stocks have pretty much moved in one direction. So, I think a hiccup is warranted. And I don’t think that’s right. And I guess what we’ve what we the spin we have put on it is just that because we don’t have a crystal ball. What we do know is that the capital expenditures related to artificial intelligence are very real.

You can go look through data points like industrial production, and you can kind of get a read on how much of this money is actually being deployed. And it’s a very, very real experience that we’re having. What we don’t know is if the market’s going to continue to price up these shares of these companies. And so that’s where what I would say is portfolio sizing, position sizing.

That’s what really needs to be considered right now. Because like you said, these names aren’t just going to move in one direction in perpetuity. So you just need to make sure that you are comfortable with some level of volatility. And I think you have to have a closer look at how you are actually sizing positions is real.

But I heard something else that I thought was interesting over the weekend, and I don’t think that data was that old, but, someone was talking about are the valuations in some of these tech companies really extended? And Nvidia was was trading at a 35 times multiple. Well, you know, a handful of years ago is at 90 times.

Right. So there’s CapEx, there’s earnings. These stocks while they’re extended, they’re probably not red hot in terms of how overextended they are. So, everybody needs to settle down. Yeah, I mean, I, I, Daniel, I think a couple of points that you made. I mean, number one, the CapEx is real. You know, this is not 2000 building fiber optic cables to nowhere.

Nobody’s buying Nvidia chips and storing them in a warehouse or in a closet. So it is real. What? Where I am focused or, you know, the one thought that or my big takeaway from from those comments, though, is that the tech drive can ripple into the broader equity markets and that can be the concern. And could we expect to have a year where, you know, markets really trend sideways, or two years where markets trend sideways as large cap tech grows into these valuations?

I mean, right now you have the S&P 500 equal weight. So taking 500 companies equal weighting on up less than 7% year to date. You have the S&P 500 up over 16%. The Nasdaq 100 is up over 20%. So again that the market returns are being driven by large cap tech. And I think investors need to start to prepare themselves mentally for a period of time where these large cap tech companies don’t pull your portfolio up 10%.

Yeah, I think that’s very well said. And, I’ll just boost, LinkedIn posts I had from last week that shows just how how meaningful that tech bump has been. So if you look at October, in the S&P 500, 92% of the, 2.33% S&P 500 index return for the month of October was driven by information technology.

I’ll take that one step further and say at the headline index level, the S&P 500 index was up 2.33%. The equal weighted S&P 500 in October was down almost a percent. So that just shows you how massive the drive of these tech shares has been and why, when you get when you get a different environment where tech is not red hot, how that can be a completely different market experience, if you will.

Yeah. And this is you know, the earnings growth is coming from tech. You know, to be fair, this isn’t just, you know, bidding up something without. Correct. There are there is justification. But but I think what we’re saying is, you know, these companies might not always just save the day and pull the markets off as much of the magnitude they had the last three years.

Yeah. Okay. What’s next? Yeah. So somewhat related. But we’ll talk about the Federal Reserve. Week and a half ago, we had the Federal Reserve cutting interest rates, but signaling caution. So the fed met week and a half ago, reduced its key policy rate by 25 basis points to a range of 3.75 to 4%. But what was more focused on was that Chair Jerome Powell and his colleagues emphasize that further cuts are not guaranteed and that data will determine its path.

So I think that’s important because, let’s call it going into this meeting, I think there was a fairly high likelihood, at least priced by market participants, that we are going to get another 25 basis point rate cut in December, and that is certainly not a foregone conclusion at this point. And why it matters is because rate cuts are generally seen as fuel for stocks, cheaper borrowing, more liquidity, etc., etc. but when you have the central bank start to signal restraint, markets just might respond a little less enthusiastically.

So this pause and certainty around future cuts means that investors must reckon with a world where monetary support might not be as strong as previously hoped. And so this combination of cut now, but maybe no more soon introduce this decisive shift in monetary policy expectations, which don’t just affect bond yields, but they also affect valuations among stocks in the US.

So still kind of grappling with this lack of data availability, which makes it really hard for investors to try to game this all out. So I mean in this the comp the the commentary from Powell is just logical, right? I mean, if he starts to, you know, indicate that they’re going to cut a bunch in the future, then the markets are going to rally and rip, and we’re going to be back to a situation where inflation could, you know, pop up and be more of an issue.

So they really, again, you know, have to strike a fine line here with, with keeping you know, the dual mandate. So to speak, you know, in focus, which is, you know, to control inflation and to maintain full employment. So I think these, you know, with where the economy’s at right now, the economy is doing just fine. You know, obviously we’ve we’ve talked about or people have talked about, you know, it was really driven by the top 10%.

And you know, other cohorts of people are struggling, but I don’t know if it’s necessarily different this time. I think that’s, you know, been a unfortunately been a, you know, a common theme for a while now. So at the end of the day, I mean, you know, inflation does affect some of the people in the lower, income levels more than the higher income levels.

And I think that, you know, this mentality and this commentary just makes sense with where we’re at. Yeah. Yeah, I agree with you. And it’s, you know, it’s just in this hard position right now, which we’ll talk about the government shutdown and how some of the data delays are weighing on markets in a moment. But, you know, the fed is somewhat flying blind.

You know, we were supposed to get, another jobs report last Friday. We didn’t. Same with, the the September jobs report that we never got. So with the fact that labor has been the primary reason why the Federal Reserve has embarked on this cutting trajectory, it’s no surprise that Powell is going to hedge his language a little bit.

Right. So we do kind of just have to wait and see, right? Underlying economic growth is still fine. But as we get more data availability, you’ll see people start to game out what the rest of the year and the next six months really look like. So, as I kind of alluded to, we have this situation where at this point, the longest government shutdown in the U.S. in history, the delayed data that is resulting from this shutdown is starting to weigh on markets.

So in the US, this ongoing shutdown has led to a lot of delays or suspensions of key economic data releases. I mentioned the jobs report, but that’s just one of many examples you could cite. At the same time, you have investor sentiment that’s being impacted by this uncertainty around fiscal operations. So why all this matters is because economic policy, and I would say markets in general thrive on data when key releases like jobs reports or inflation data, etc. are delayed or missing.

This just raises risk because there’s more uncertainty. So right now you have markets that are becoming more sensitive to unknowns. You know, what is the true state of growth or what is the true state of inflation right now. So you might have risk premium start to increase. The shutdown also adds to some political and fiscal risk which can feed through to credit markets.

Bond yields investor confidence. So all of these little items are inter playing with one another. And it’s just starting to weigh on markets a little bit. You’ve seen it actually pop up in investor sentiment as well which has gotten incredibly pessimistic. All while the market is hovering around all time highs, which is a pretty interesting dynamic right now.

Yeah, that’s having a real world effect on, travelers. Right. So flights are being delayed or canceled. So I don’t know. My gut says that this isn’t gonna persist forever. And so I think we’re getting close to some kind of solution here. It it’s just not going to continue. Yeah. The uncertainty is I don’t want to call it healthy, but it’s it’s to be expected.

Right. Okay. We’ll wrap up with some talk on credit markets in the US. You have had some credit concerns in the US, specifically around regional banks start to spark some market jitters. Several U.S. regional banks have disclosed significant credit or bad loan fraud issues, which has prompted some sharp declines across the sector and and stoked some renewed worries about underlying credit quality.

Why does this type of item matter well. Banking credit is it really is a foundational part of the plumbing in the financial system. If regional lenders are starting to show signs of stress, that’s when you have some contagion risk start to rise. So investors might start to become more cautious about lending, refinancing and the general health of, say, commercial real estate exposures, especially as regional banks tend to have higher exposure there.

I think the bottom line is a shift in the perceived safety of banks or credit markets can again trigger some broader equity market or bond market reaction in a in a risk off manner. So I don’t I wouldn’t say the house is burning down, especially because, the underlying data on things like loan delinquencies, which are really good reads on underlying economic health have all been fairly solid.

But whenever you get these types of, let’s call it, you know, bad loan or fraud, fraudulent loan type press releases, I feel like people are still recovering from the 2007 experience. So to be aware of is for awareness, you know, more aware of it. You know, Jamie Diamond says you don’t need need. He said he said, I probably shouldn’t say this, but when you see one cockroach, there’s probably more, right?

And so, you know, this is just, it’s one of those things that that does happen from time to time as banks aren’t going under, but they’re just taking charges, you know, one off charges, which means they’re writing down loans effectively to less than what they’re issued. And we don’t even know the magnitude of which that are.

They’re, writing off a loan. Talk about spreads. What’s what are you seeing? Yeah, that’s. Well, this is interesting because I would I think the headlines you’re getting right now from the last two weeks is that credit market spreads are widening and widening, and that’s signals some increased caution. So credit market indicators like the spread between, you know, yields on US corporate bonds and comparably safe US government debt.

When you have those widening that generally suggests heightened investor concern about economic and credit risk. But what the press releases aren’t telling you right now is that we we had credit spreads at such a low level that really the only direction that they can go is higher, right? I mean, generally speaking, credit spreads widening is a classic risk off indicator.

It just means that investors demand a higher premium for holding corporate debt relative to safer. Call it U.S. government or sovereign debt. I think they’re not concerning. No, I mean, there’s still, at least if you look back through history at at tightness levels that are very uncommon. And again, like, I don’t think there’s anything to write home about here.

If you talk to bond market investors, it’s really challenging for people to rationalize paying up for corporate debt right now. I mean, spreads are just so unbelievably tight that you’ve had a lot of fixed income portfolio managers have to kind of get creative for, call it a similar experience, like investment grade corporate bonds that they’re just not willing to pay up for.

So for what it’s worth, even though you might see some some spread widening and credit markets from here, overall levels are still very low. We have some lines in the sand when we talk about making portfolio decisions and portfolio action from a bluechip standpoint, you know, we we we monitor these levels closely and we have some lines in the sand that the do cause us to get defensive or take some action should it be warranted.

Yeah, 100%. And you know for yeah, for full disclosure, we’re not even close to there yet. So certainly worth monitoring. But, you know, just to kind of summarize, spend some time talking about big tech and AI stocks and current standing there and what’s gone on over the last couple of weeks talked about the situation going on within the Federal Reserve.

And then finally some stuff on government shutdown and, and some credit flare ups. Anything else to add before we close, guys? Now? I was good. It’s okay. Well, as always, thank you so much for joining us for another episode of blue Chip now, and we look forward to speaking with you all again soon.