I always maintain that choosing a good investment is not demanding.
Just ask Google for a list of businesses with steady revenue growth, healthy cash flows, competitive brands, a broad customer base, and experienced, stable, and ethical management that makes spending on research & development a priority.
A company that meets those standards is well worth considering. And there are many. Putting together a portfolio of dependable stocks doesn’t require great skill. Managing the emotions of clients does.
Private investors are inclined to evaluate their net worth from the highest point reached, and any reversal from that level is deemed a loss. Advanced technology allows investors to measure their wealth in real time, in much the same way as they monitor their heart rates, calorie consumption, glucose levels and sleep patterns. Managing a portfolio nowadays is like competing on the popular sporting app Strava, with its robust tracking features and challenging leader board.
So far this year, the S&P 500, a gauge of US markets, is up an impressive 15%, while Nvidia, the semiconductor company whose astounding growth is the vanguard for the AI industry’s success, is up 125%. Both have retreated from their recent highs, but what is considered a rational reversal has unsettled the market enough to raise doubts and feelings of despair.
Yet, that is how markets rock. Two steps forward, one back. The problem is that it is impossible to calculate accurately how big those steps will be, and what will power them. After this year’s exceptional gains — driven exclusively by big moves in technology counters — traders were positioning themselves for a major crack. Hoping to capitalise on their success and book some profits, they searched for a catalyst to set off the panic.
Many assumed the attempted assassination of former president Donald Trump would trigger the alarm bells, but in hindsight the reason for the recent market sell-off looks more rooted in the results of consumer companies such as McDonald’s, where falling revenue and lower-than-forecast earnings reflect the strain lower income earners, around the world, are experiencing.
Federal Reserve chair Jerome Powell recently accepted that high interest rates were more of a threat to the US economy than inflation, and confirmed on Wednesday that the time was approaching to moderate the bank’s restrictive monetary policies.
Bill Dudley, a former Fed governor, in a sharp reversal of sentiment, advocated that rates should be cut sooner than later, arguing that inflation had abated, and that cooling employment data was a signal the US economy could be sliding into a recession. Nobel laureate Paul Krugman, writing for the New York Times, agreed, asserting that the labour market was weakening and looking pre-recessionary. He believed there was a strong case for cutting interest rates.
For the past 18 months, the technology sector has been the sole support for global markets. Outside those firms that have spent on hardware, software, and services to develop artificial intelligence applications, there was little else to cheer investors. High global interest rates, political changes in the UK and France, the upcoming election in the US, wars in Ukraine and Gaza, and the implications of China’s decelerating economy on global trade and commodity markets relentlessly threatened the tech industry’s achievements.
Questions over the promise of AI persist. Regardless, the outlook for the industry remains positive. But the time has come for central banks to share the heavy lifting and take some of the strain off the tech warriors. They can do that by reducing interest rates. September can’t come soon enough.
• Shapiro is chief global equity strategist at Sasfin Wealth.
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