How Many Souls On Board? Navigating an AI Market Emergency

Investors are all in on the AI trade. What if it fails to deliver? The US Economy is inextricably linked to the success or failure of artificial intelligence. David Nelson, CFA host of the Money Runner podcast dives deep into the AI trade weighing in on events that could catch investors off sides. How to handle the next correction an more important what our future looks like if the promise of AI does live up to the hype. 

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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How much fuel, how many souls on board? Those are the questions every aircraft controller asks a pilot after they've declared an emergency. The truth is they want to have an idea on just how bad the crash is going to be and how many people might die. As a commercial pilot and one who's had this conversation, I can tell you I don't want to have it again, but it doesn't keep me from flying. Almost everything in life worth doing has risks. Today, if that engine quits, I know where I'm going to put the plane down. Running money. Same thing. When you invest in stocks. An emergency can pop up at any moment. What's your plan B? Welcome to the Money Runner. I'm David Nelson. The market concentrations is a b**ch. I get it. You’re noticing a handful of stocks dominating index performance and thinking something's off. Well, something is off. But it's not just the market, it's the economy. The market concentration is being driven by the earnings concentration. And as I pointed out in this week's post, Bears looking for payback outside a handful of mega-cap tech giants in aggregate. The fundamentals just aren't there. The market is a reflection of the economic winners and losers from Wall Street to Main Street. And right now, the most dominant theme in the economy is how every company is going to benefit from a trickle down productivity promise of artificial intelligence. Let's go to the charts. We know the S&P 500 and tech heavy Nasdaq are outpacing mid-caps and small caps. But even within the large cap index, the gap between winners and losers continues to widen. In the last four weeks, while the broad indices rose, the percentage of stocks trading above their 200 day moving average continues to fall. Not unprecedented, but certainly a red flag. Every bull market has corrections, and every investment theme stumbles during the long journey on I-95 north. How you handle the fall matters more than you think. Even bulls like yours truly have to plan ahead. When the correction in the AI trade comes, it will be dramatic. Talking heads will be screaming. It's déja vu all over again. Your favorite financial news outlet will show you comparison charts to the bursting of the Internet bubble. Some will hold prime time specials on how to protect yourself from annihilation. The truth rarely lives on the extremes. So maybe a more nuanced approach is in order. First, look at what's driving the sell off. Is it a statistical reversion to the mean to relieve an overbought condition? That’s one possibility, but here's a more likely scenario. A software company announces they aren't getting the return on investment from their artificial intelligence rollout and decides to reallocate funds. A major chip manufacturer announces they have to clear some inventory. Trust me, stocks won't open down 5%. Think 15 20 The above are possibilities, but until there's evidence to back up those fears, don't convict and sentence your stocks to be banished from your portfolio just because you're afraid of giving back some profits. Nvidia just passed Microsoft and Apple and is now the largest company on the planet. It shouldn't be surprising if it's the largest position in your portfolio. Investors went through the same anxiety when Apple passed Exxon in 2011. Apple first hit the $1 trillion milestone in 2018 and crossed$3 Trillion 5 years later. What makes some Nvidia’s assent remarkable is that its market cap more than doubled last year and then went on to pass the one, two and $3 trillion milestones in just over 12 months. For those of us who manage money for a living, we are judged relative to some benchmark, maybe that's not the way it should be, but that's the way it is. Fo PMs. Who are market cap weighted in Nvidia, it likely represents 6 to 7% of the portfolio. If there's a 20% correction, it will cost our funds about 1.3%. Make no mistake, that would hurt. But it's recoverable. The bigger challenge is that technology as a whole now is 32% of the market, with many stocks exposed to the AI trade. A 20% correction here. That's real money. It's worse than you think. How many companies in every industry have mentioned AI in conference calls and how it will benefit their top and bottom lines? And how many industries outside of tech are direct beneficiaries of the buildout in AI infrastructure? Utilities and energy companies will profit as they provide more power to data centers. The industrial sector as HVAC companies make their fortunes building cooling units for the chips. Even retail as A.I. is used to analyze consumer behavior and better design products. Airlines use AI to manage logistics and maintenance programs. The shipping companies do the same. And let's not forget, artificial intelligence has military applications and someday could be in charge of our nuclear arsenal. In other words, the tentacles of the A.I. trade touch almost every industry and are now embedded into the future of our society. Nvidia may be the biggest A.I. stock in your portfolio, but it isn't the biggest risk we face. What if A.I. doesn't deliver on its promise? What if the vast infrastructure built around artificial intelligence doesn't yield the expected returns? The consequences would ripple through every sector, shaking the very foundation of our economy. The stocks that have driven the market performance could plummet, dragging down indices and investor portfolios alike. Imagine the panic as companies across industries announce that their A.I. investments aren't paying off, leading to massive sell offs and a market correction far more severe than anticipated. The very lifeblood of our economic optimism hinges on the success of A.I. If it falters, the repercussions could be catastrophic, leading to a crisis of confidence not just in the tech sector, but across the entire market landscape. The stakes have never been higher. The U.S. economy is now extremely linked to the success of artificial intelligence. It better work! Because if it doesn't, the fallout will be unlike anything we've seen. There's a flip side. What if they AI does live up to the hype? The potential for positive impact is immense. Artificial intelligence could revolutionize health care with faster diagnosis and personalized treatments, leading to better patient outcomes and longer, healthier lives. It could transform education, making high quality learning accessible to everyone, regardless of their location or economic status. A.I. could drive innovation in renewable energy, helping us combat climate change and build a sustainable future. The successful integration of A.I. could usher in an era of unprecedented prosperity, solving some of our most pressing challenges and creating opportunities. We can't even imagine yet. If A.I. delivers a truly change the world for the better, making our lives richer, healthier and more fulfilling. Like I said, everything in life we're doing has risks. The future's uncertain, but the potential for greatness is there. Embrace the possibility. Stay informed. The promise of artificial intelligence is not just about economic growth. It's about the hope for a better tomorrow. I'm David Nelson. And this is the Money Runner.