Stocks are shrugging off concerns over the US government shutdown that began this week. This can continue as long as the shutdown doesn’t last too long, but after a couple of weeks investors may become nervous. Markets are essentially “flying blind” with regards to the direction of the economy since we no longer have the regular economic reports that are typically developed and released by the government. We were supposed to receive the September unemployment report today, but that’s not happening. The September inflation report is scheduled to be published on October 15th, but we’ll have to wait and see.
While momentum in the US stock market is carrying it higher, market indices are becoming extremely concentrated in just a handful of companies. Concentration risk is now at an all-time high, with just 10 stocks making up almost 40% of the S&P 500.
This is certainly not meant to endorse or discourage investment in these stocks. Instead, it’s important to note that the behavior of major US equity indices going forward will be heavily influenced by fluctuations in the stock prices of these companies.
9 of the top 10 companies listed above are technology companies, and investment in artificial intelligence (AI) has been the primary driver pushing their stock prices higher. A lot of money has rushed into AI, and it’s becoming clearer that AI has the potential to create tremendous change. But when it comes to investing, will we see a sufficient return on investment quickly enough to justify the sudden massive investment? No one can argue that the internet changed the world and created enormous wealth, but it took longer than many investors were willing to wait, leading to a 50% decline in the S&P 500 and a 78% decline in the Nasdaq from 2000 to 2002.
I’m not saying that we’re in a bubble, but how this AI boom plays out will depend on how quickly it can show real benefits and how long investors are willing to wait. While history doesn’t necessarily repeat itself, Goldman Sach CEO David Solomon recently warned that there are some similarities to the “dotcom bubble”.
“You’re going to see a similar phenomenon here,” he said. “I wouldn’t be surprised if in the next 12 to 24 months, we see a drawdown with respect to equity markets … I think that there will be a lot of capital that’s deployed that will turn out to not deliver returns, and when that happens, people won’t feel good.”
No one has a crystal ball, but it appears a lot of investors may be overlooking these risks in the market. It’s a good time to be diversified.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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