As I noted yesterday, there’s a 99% probability of a recession according to The Conference Board. We’ve seen significant weakness in materials stocks, energy stocks, and consumer cyclical names.
The most critical parts of our economy for sustainable growth – housing and durable goods – remain under serious stress. Commercial real estate prices are falling.
Inflation remains frustratingly sticky – and it’s grown increasingly clear that the Federal Reserve will need to leave interest rates higher for longer…
So, how’s the S&P 500 – a forward-looking indicator – still elevated above the 4,000 level? Well, that’s a confusing topic – until you dig under the hood and find two words written all over the market’s engine…
Artificial Intelligence.
How AI Powers the S&P
Since ChatGPT burst onto the scene this year, the markets have fallen in love with Artificial Intelligence. Societe General reports that without the AI frenzy powering this market, the S&P 500 would be down about 2%.
Investors have crowded into Nvidia (NVDA) – a maker of AI chips – on a level that we’ve only seen in the past from Tesla (TSLA) in recent years and Cisco System (CSCO) during the Dot-Com Bubble. NVDA stock is up nearly 100% since the start of the year.
Investors are also crowding heavily into Apple (AAPL) and Microsoft (MSFT) – the latter owning a stake in ChatGPT.
AI is responsible for all of the 8.1% return for the S&P 500 this year.
Despite all of the concerns about the possibility that AI eradicates millions of jobs, the focus is on how AI can and will increase productivity and produce greater profitability. If that sounds a little dystopian, it’s because that’s the great divide that approaches.
But there’s another important component ahead.
Is AI the Solution to U.S. Debt?
If productivity gains accelerate from AI, and economic growth expands profoundly, one must ask if the U.S. could technically grow its way out of its debt.
My assumption, however, is that it can’t. The reason all harks back to central banking.
Central banks engage in inflation targeting – a process of printing money and putting it into circulation to combat deflation – largely brought on from technological advancement.
Inflation targeting started in the early 1993s under Alan Greenspan, although it wasn’t acknowledged as a trend until decades later.
Should AI be highly deflationary and reduce employment in America, it will try to spur inflation – pumping money into the system.
The problem is that while technology is deflationary (and AI will be extremely deflationary on a compounding level), real assets are not.
We can’t print food, and we can’t print gold. We aren’t increasing our housing supply due to policies that limit growth in those areas.
So, while AI presents a good place to be aggressive in your portfolio, it’s very important to have a portfolio that produces inflation-beating returns and finds value in the stuff we need: Food, energy, housing, and other real assets.
Those things are never going away. You can get access to both of my portfolios in Tactical Wealth Investor.
Sign up today… as I’ll release my bi-monthly update on the economy and the portfolio tomorrow, Wednesday, May 17.
Also, tomorrow, I’ll be a part of the “Roundtable.” We have a stacked lineup for you:
- We’ll show how Celeste, Roger, and Garrett are handicapping the looming debt ceiling X-date and the threat of recession…
- Next, we’ll explore how Celeste sees small caps outperforming in several sectors. Could this mean the bottom is in for stocks? Plus, she’ll share 2-3 seasonal trade setups and a post-FOMC trend.
- Garrett has his latest on oil prices so we’ll find out from him where he thinks they’re headed. He also sees insider buying as building a regional bank bid for certain value plays.
- Regarding regionals, Roger sees several shorts setting up (it takes two to make a market). And he’ll take us on a deep dive of QQQ internals.
Join us at 11am ET tomorrow for this free live event RIGHT HERE.
To your wealth,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Yellow
There is absolutely no trend to this market except for artificial stocks going higher while the rest of the market prepares for a recession. So, take a moment, and let’s wait for some sort of trend to develop.
