Tech Stocks Under Pressure
Nvidia’s results were the centerpiece of a turbulent week in which the US market fell 1.9%. Despite surprising investors with better-than-expected profits, Nvidia NVDA fell 5.9% and is now down 15.7% from its peak in late October. Amazon AMZN also fell sharply, down 5.25% in a week in which it announced a USD 12 billion US bond issue to fund data center expansion. These declines precipitated sharp falls in the technology and consumer cyclical sectors that is being attributed to growing skepticism about the scale of investment being made in AI.
Netflix and Meta Stock Under Pressure
However, the 2.9% rise in communications services stocks suggest a more nuanced reality. Despite raising USD 25 billion of debt to support AI development earlier this month, Alphabet GOOG rose 8.2% over the week as Google’s parent company benefited from the news of a USD 3.7 billion investment from Berkshire Hathaway in September and a favorable judgment in a dispute with the Department of Justice. In contrast, sector heavyweights Meta Platforms META and Netflix NFLX both fell sharply. Rather than a growing rejection of AI investment, these diverse outcomes may indicate that investors may be becoming more selective in identifying companies able to deliver an attractive return from the current spending on AI.
Uncorrelated Stock Sectors Perform
Consumer defensive, healthcare and real estate were the only other sectors to rise last week. Consumer defensive and healthcare stocks tend to be less correlated with economic growth and therefore favored by investors when seeking greater diversification in their portfolios. Having been very unloved earlier in the year, healthcare stocks have gained 13.6% over the last three months and are now priced near their fair value.
Tech Weakness Drags Down Emerging Markets
The weakness in technology stocks was reflected in the 3.6% decline in emerging markets, led by China (down 5.6%) and Taiwan (down 4.3%) while developed markets outside the US also fell due in part to a rise in the US dollar.
While we should not judge the diversifying qualities of our portfolios on the returns of a single week, these moves highlight the importance of ensuring that our portfolios do not contain fault lines that could overwhelm superficial diversification and tie a portfolio’s returns too closely to a single outcome. Effective diversification must consider the fundamental drivers of cash flows of the assets.
What the Blue Owl Setback Means for Private Credit
Private assets have become one of the favored destinations for investors seeking diversification over the last few years. This has led to a sharp rise in semiliquid funds focused on private credit that appear to offer a more attractive liquidity profile than private equity. However, the failure of a proposed merger of two business development companies managed by Blue Owl indicates that demand may be weakening. Morningstar analysts Brian Moriarty and Jack Shannon provide a clear explanation of this complex issue in this article. To support investors assessing these strategies, Morningstar has just released the next batch of semiliquid fund ratings.
Interest Rate Cut Odds Shortened
The delayed September US employment report was issued on Thursday, showing higher-than-expected job growth. However, economists highlighted that employment is unusually weak and continuing to trend downward, while unemployment increased from 4.3% to 4.4%. There will be no October employment report due to the shutdown. The November report is due to be issued after the next Federal Reserve meeting, increasing the uncertainty around the outcome of that meeting.
This uncertainty was obvious in the movements in interest rate expectations last week. Despite the release of the October FOMC minutes indicating that “many” participants favored holding interest rates at their current level for the rest of the year, there was a sharp increase in expectations of an interest rate cut at the FOMC’s December meeting following comments by New York Fed President John Williams on Friday. By the end of the week investors were assigning a 71% probability of cut in December, up from 44% the previous week.
Although it is natural for market participants and commentators to become embroiled in predicting interest rates movements, investors should remember that such predictions are necessarily short term in nature and have little impact on the returns investors receive over a reasonable investment period.
Economic Data Vacuum Risks Market Volatility
While the Federal government shutdown may have ended, its impact on economic data continues with both the PCE measure of inflation and the second estimate of US GDP growth pulled from the release schedule in this Thanksgiving-shortened week. With few economic or company data points to anchor market movements, volatility could arise from unexpected quarters, such as the ongoing negotiations over Ukraine’s future. In such environments, it is more than usually important to try to avoid extrapolating news into investment decisions.
