Hey everyone, as an experienced portfolio manager who's seen countless investment trends come and go over my 30+ years in the investment business, I wanted to share some thoughts on navigating the latest craze around AI and emerging tech.

I know firsthand how tempting it can be to get swept up in the hype - I certainly got caught up in the dot-com bubble back in the 90s when I was a growth mutual fund portfolio manager!

But over time, I've learned just how crucial it is to go beyond the surface-level excitement and herd mentality.

Too often, investors (myself included) let emotions and bias cloud their judgment when sexy new trends hit the scene. 

We throw the traditional rules of valuation and risk management out the window in hopes of discovering "the next big thing."

I'm sure many of you have been reading the breathless headlines about how AI is going to revolutionize everything. And look, the potential is tremendous - no doubt about it! I have been experimenting with ChatGPT and love it, but is it ready for prime-time investing and analysis? Not quite yet!

Potential doesn't always translate smoothly into stock market success or reach mass adoption as quickly as we expect. New technologies often undergo a lifecycle from initial hype to eventual mainstream adoption.

Remember online banking in the early days? I sure do. It took forever for consumers to actually trust and widely adopt what back then seemed like a crazy concept. But now it's second nature to us all.

What about artificial intelligence (AI), weight loss drugs, and blockchain technology? All this great stuff is being applied today, but I am pretty sure that we haven’t seen the final evolution of these innovations.

So for those looking to tap into the immense possibilities of AI and similar bleeding-edge tech, patience and prudence are key. I cannot stress enough how important it is to give these innovations time to seep into the mainstream.

As a rational investor, it’s important to tune out the noise and make objective evaluations.

Getting into the innovation game through index investing:

Index funds, which track a broad market index, inherently include companies that are at the forefront of current innovations. By investing in indices such as the S&P 500 or the MSCI EAFE, you are essentially investing in the innovation of the day, albeit in a more diversified and risk-managed way.

• Want exposure to AI? You’re already neck-deep with companies such as Microsoft, Google, and Amazon.

• Want exposure to weight loss drugs? Elli Lilly is a big part of the S&P 500. Its main competitor, Novo Nordisk, is one the largest index weights in international equity funds. More reason to root for overcoming the obesity crisis.

• Want exposure to blockchain technology while looking super cool with your kids? You can go buy a Bitcoin ETF, but why when you’re already getting exposure through IBM, Mastercard, Paypal, and Square? Even JP Morgan is experimenting with blockchain technology.

By investing in broad-based index funds you are already benefitting from the growth potential of these emerging sectors while buffering against the high risks associated with individual stock investments.

Never underestimate the power of boring old diversification!

I know, I know - it feels way more exciting buying into the hot new stocks everybody is chasing. You’ll need to deal with the fear of missing out (FOMO) but remind yourself that a balanced portfolio will save you from the volatility and uncertainty that comes with making big bets on these innovations before they become part of the mainstream.

Look, I've made my fair share of mistakes getting sucked up in market manias. I hope that you all can learn from my past blunders and approach today’s innovations (and whatever big trends come after!) with clear eyes.

Embrace the future, but don’t forget about risk management and common sense! 

With over 30 years of experience managing portfolios, I've witnessed this cycle firsthand. Vet every investment on its own fundamental merits, no matter how hot the trends or tempting the FOMO.

The Big Picture:

• Equities keep outperforming bonds. The dominance of US large-cap equities has been a key driver of the outperformance over the last decade.

• The big winners last week were Commodity investors in particular those with heavy oil exposure. Geopolitical unrest was the main driver. The Goldman Sachs Commodity index was up over 4% last week alone. Year-to-date it’s the best performer among major asset classes.

• Reit investors took a small loss last week as expectations for a March Fed cut diminished.

• Cash is again outperforming bonds this year. Until there is more clarity as to the direction of Fed policy this situation is likely to persist.

• The investment environment remains risk-on. Aggressive asset allocation strategies continue their outperformance.

Economy:

• The US economy seems, to the surprise of many, to be in decent shape. The unemployment rate stands at 3.7%, inflation is trending down toward 3%, and all indicators of growth are pointing up with 4Q 2023 GDP growth beating expectations at 3.3%.

• China announced $278 billion in stimulus measures to prop up its struggling economy and stock market. China's growth has slowed sharply due to its property downturn and deflationary pressures. Its stock market has plunged 40% over 3 years. The stimulus aims to revive consumer confidence and stabilize growth. A faster-growing China will provide a nice boost to the rest of the world.

• Europe is stalling as well and business activity shrank for an eighth consecutive month in January. The ECB appears reluctant at the moment to cut rates, but their hand may be forced unless growth revives.

Equities:

• Earnings season in the US is 25% complete. Thus far earnings season has been a snoozer in aggregate with a couple of bombs thrown in there by Humana (rising medical costs) and Tesla (lower profits due to discounting). On the positive side, everybody now seems to be streaming with a Netflix account (of the legal kind).

• This coming week is huge for earnings in the US. It’s Tech Week with Microsoft, Alphabet, Amazon, Meta, and Apple on deck. On the scary front, Boeing is reporting this week as well. We already know the story but how are future growth and profitability going to be affected?

• In terms of “style”, growth and value performed similarly. The key differentiator of performance last week amongst US equities was “size” with the Russell Microcap Index up over 2.5%.

Bonds:

• The Federal Reserve meets this week. Nothing in the macro numbers would indicate a hurry to lower rates to prop up the economy. I sense that the Fed will stand pat as long as it can and watch (optimistically) the inflation rate get closer to its target of 2%.

• Long-maturity Treasury bonds lost money again last week. I don’t see much of a reason to hold maturities beyond 5 to 7 years at the extreme. Unless you’re a pension fund cash flow matching longer maturity obligations why not wait it out in short-term debt?

• I might be accused of being an equity simpleton but my 4% yield in cash is just fine with me (especially with inflation trending down). For example, the iShares Short Treasury Bond ETF (SHV) currently has a 30-Day SEC yield of 5.14%.

Alternatives:

• Ethereum and Bitcoin flipped roles last week with Bitcoin up nearly 6% and Ethereum down 2%. Activity in the Bitcoin ETF spectrum has been strong. The Blackrock Bitcoin ETF (IBIT) just broke through $2 Billion in assets under management (AUM). Market intelligence points to a sharp drop in short positions held in brokerage accounts.

• Energy prices jumped up last week as tensions in the Middle East took front and center stage. Oil demand in the US also continues to be strong as economic growth remains robust. Oil was up 6.3% while Natural Gas was up 7.6%. The path of energy prices will likely be a highly sensitive issue in an election year. For example, gasoline prices were up 6.5% last week and who likes that, right? Please let’s not go back to the summer of 2022.

• The US Dollar remains robust. It was flat last week after a strong start to the year. Year to date the biggest mover versus the USD has been the Japanese Yen. As of Friday, the yen had depreciated 4.5% versus the USD. Market participants have been awaiting an end to the easy money policy of the Bank of Japan but no change appears imminent, especially in light of disappointing retail sales last week.

Signal Versus Noise

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