THE ARTIFICIAL INTELLIGENCE BUZZ, TRUE OR ARTIFICIAL?Submitted by Retire Source Wealth Management on July 27th, 2023
A buyer is expected to reasonably examine the goods before making a purchase. I ignored this principle when buying my first car. I spotted my car, paid the man, and drove off in igorant bliss. I soon discovered I owned a piece of junk with leaks in the radiator, fuel tank, and exhaust. I could have prevented some heartache if I had not let my excitement override more rational and reasoned thought.
Sometimes I see investors making a similar mistake. They get so excited by a company's "story" that they don't stop to make a rational evaluation of the company's ability to sell its product at a profit. A rush of excited investors can make a stock's price take off like a rocket ship. After the initial enthusiam fades, investors become more rational. They look at the company's sales and profits and are often disappointed. When this happens, the stock starts to look like a rocket out of fuel. Gravity can hurt!
Recent "story" stocks that ran out of fuel include electric vehicle maker Rivian, cannabis seller Tilray, space travel company Virgin Galactic, and cryptocurrency exchange Coinbase. They're all down about 80% or more from their peaks. Ouch! Most recently, investors have rushed into anything related to artificial intelligence (AI). Once again some companies' stock prices seem pumped up by unrealistic enthusiasm (all prices as of 6/22/23).
What's unique about the "story" craze of AI is its impact on some popular stock market indexes. Due to the way some indexes are calculated, technology related stocks (which include AI) can have an out-sized influence. According to data from S&P Global, as of 6/30/23 about 13% of the stocks in their S&P 500 index are technology companies, but these stocks account for about 26% of the index performance. Why does that matter?
Artificial computer intelligence may be a real thing, but my old gray matter brain tells me that rocket ships and "story" stocks are still subject to gravity. When the rocket fuel of enthusiasm for AI stocks runs dry, the entire technology sector may get dragged down. If that happens, the tech sector's out-sized 28% influence on the S&P 500 will magnify the drop in the index and a lot of investors' portfolios.
Right now most investors should avoid technology heavy index funds and be aware that many popular market indexes are no longer a good benchmark for a diversified portfolio. Year to date the value-based stock sector has remained pretty grounded and might be a good way to keep your head out of the clouds.
Frank Rizzo, CERTIFIED FINANCIAL PLANNER TM
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