Life in the Fast Lane

Fans of Broadway musicals will recognize the opening lines of the Leonard Bernstein/Stephen Sondheim song “Something’s Coming” from the 1957 Tony award-winning play West Side Story. The song came to mind after a friend shared his fear that something – he’s not exactly sure what – is coming that will cause markets to tumble from their recent highs given “all that is going on in the world,” e.g., labor market weakness, government shutdown, tariffs/trade wars and the big one on everyone’s mind, the (maybe) bubble in Artificial Intelligence. Legitimate concerns, all. Yet the Bernstein/Sondheim song is one of optimism, for a future “bright as a rose.” And indeed, the reality is that not all that is going on in the world is bad for stocks: corporate earnings have for the most part remained strong, the impact of tariffs has so far been relatively muted and perhaps most important of all from a purely economic standpoint, the Federal Reserve has taken notice of the weakening labor market and begun to lower short term interest rates. From a market perspective, that is optimism, and investors have been looking past their concerns and at least for now have continued to buy stocks and push markets higher.

Regarding AI, the current frenzy reminds me of a drive home from visiting family years ago in upstate New York. The highway was empty but for a slow-moving car in the right-hand lane. I had moved into the left lane to pass when another car suddenly came up behind me and got right on my tail. Speeding up to get out of the tailgater’s way, I moved past the slower car and back into the right-hand lane. To my chagrin, the tailgater followed me – he was a New York State trooper in an unmarked car who pulled me over, ignored my pleas that I had sped up to get out of his way and handed me a hefty speeding ticket for going 82 in a 65 mph zone.

At the moment, there are really no cops on the AI highway. The only speed limit is the amount of money you have or can borrow to spend on more chips, more engineering talent, more data centers, more electricity to power and cool the computers, etc., all to get and stay ahead of your Silicon Valley competitors before the highway patrol appears (in the form of policies, rules, standards, perhaps legislation and probably litigation) and pulls your firm over for an AI moving violation. That environment has fostered a FOMO (Fear of Missing Out) race among the largest and wealthiest technology firms to pass one another while the AI highway is still straight and wide enough to accommodate all AI vehicles without slowing down.

That same FOMO mindset has taken hold among investors in AI stocks; time will tell whether it is creating a bubble in valuations. In the meantime, we have a rising AI tide lifting all boats, as the largest firms in the AI race are in the S&P 500 and Nasdaq Indices, helping to drive both of those market measures higher. We remain invested in ETFs (Exchange Traded Funds) that track both of those indices along with ETF’s that invest in the Dow Jones Industrial Average and large dividend paying stocks, both here and abroad. More recently, we have added small positions in a biotechnology ETF and a utilities ETF, as both sectors have strong technical indicators and attractive risk/reward ratios. Utilities also stand to benefit from the enormous demand for electricity generated by AI, including the huge data centers to which the big players are committing billions of dollars. Our income-oriented client accounts continue to hold diversified sources of dividend and interest income, including varying mixes of dividend paying stock funds, individual bonds, bond funds and/or master limited partnership funds.

Thank you for investing with MJB Asset Management. As always, we continue to monitor the markets and stand ready to adjust portfolios to meet changing conditions and/or client goals. There is little doubt that some of those changes will flow from the increasingly widespread adoption of AI in our lives, anything and everything from helping drivers avoid moving violations to assisting artists in creating the next hit musical. Please feel free to share any examples of how AI is impacting your daily life – I am always happy to hear from you and talk about the contents of this letter or any other matters of interest!

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Disclosure: Financial instruments discussed here may not be suitable for all investors. Before investing in any investment portfolio, Client and Financial Advisor should carefully consider the client’s investment objectives, time horizon, risk tolerance, and fees. The opinions expressed here are as of the date reflected and are subject to change. Diversification may not protect against market risk. There are risks involved in investing, including possible loss of principal. Past performance does not guarantee future results.