Jason's World

Congratulations to all of us. This has been a truly unprecedented bull run. Aside from the COVID-19 pandemic, Wall Street has been going nowhere but up for 15 years. From the post-financial crisis era to the COVID rebound to the era of the artificial intelligence boom, the stock market has defied various expectations, weathered all kinds of tests and silenced many skeptics. A special congrats if you have holdings in tech. The tech index Nasdaq has grown more than tenfold since the depths of the recession, and 66% since October 2022 alone. There’s truly never been anything like it.

But nothing is certain except change. And times are changing fast in light of Tesla’s disappointing quarterly earnings.

The foundation of this rally-excitement-is being shaken like never before. On Wednesday, Tesla’s stock dropped 12% on a weak earnings season and the delay of its much-celebrated robotaxi. Former President Trump was expected to clobber President Joe Biden and usher in a low-corporate tax era with proposals to reduce the corporate tax rate to as low as 15%, but the certainty has lessened slightly with his selection of economically populist Senator JD Vance of Ohio as his running mate. The political calculus once again underwent a dramatic change as President Biden ended his campaign and endorsed Vice President Kamala Harris, widely considered to be a stronger candidate than Mr. Biden, as his successor. While Mr. Trump remains favored to win, he faces steeper odds running against Mrs. Harris than he does against Mr. Biden.

The stock market generally fares well during election years with the S&P rising 18% in 2020 and an average of 11.28% during election years from 1928-2016. This trend of a strong stock market during election years has held except for when markets were marred in crises before hand, like during the Depression in 1932 and 1940, the dot-com bubble burst in 2000 and the 2008 financial crisis. To put this in perspective, the S&P rose an average of 9.90% annually since its inception in 1928. This signals a feeling of hope for the new president’s economic agenda during an election year.

More disappointments may be on the way as Apple, Microsoft and Nvidia will soon report earnings. The reality we are dealing with right now is that the mood on Wall Street has reversed. They find fault in everything that remotely fails to live up to expectations, and it will only intensify. This is why Nvidia, the flagship stock of the AI rally, fell 16.7% in two and a half weeks. The notion that stocks will keep going up should never be taken for granted, but given what happened on Wednesday, no one should have any illusion about what happens next.

The trend right now for even-headed investors should be a gradual shift into more secure forms of investment. While they may not offer the breakneck returns that equities markets have offered over the past 15 years, they nonetheless provide returns that keep up with inflation and have very strong credibility. Options like high-yield savings accounts and CDs (certificates of deposit) offer returns between 4% and 5%, higher than the current inflation rate of around 3%. A more appealing option would be Treasury notes as the Fed is expected to begin lowering interest rates soon which will deliver an appreciation in their value, while offering similar returns.

It’s unlikely that any other equities will fare that much better as many major funds are expected to dump billions of equities over the next week, which may continue as the outlook on the tech industry worsens. Still, it is too early to panic as we have yet to see the earnings reports of most of the Magnificent Seven companies. While the enthusiasm behind AI has dampened, it has not been extinguished…yet. The recent drop may well be a temporary correction than a beginning of a bubble burst that will warrant a total exodus from equities. We have yet to see the earnings reports of most of the “Magnificent Seven” companies, specifically those of the largest among them, Apple, Microsoft and Nvidia. They will provide more definitive insights into whether the AI boom has come to an end. The technology’s potential for transformative impact across industries remains significant, though only time will reveal the true scale of AI’s impact on the fundamentals of businesses and the economy at large.

In light of this, fixed-income assets should be regarded as a source of stability that hedges against the volatility of equities without forgoing the high potential return of equities altogether. Investors should maintain exposure to potential tech sector rebounds while simultaneously building a buffer against market volatility.