AI Bubble or Summer Stall? Where We Stand In The Stock Market

Summer seasonality in the US stock market is historically a real “thing”.  The data confirms it.  With that, it should come as no surprise to invesors that the stock markets have consolidated and sold off since July 19-20^th, which was the week of July option expiration 4 weeks ago.

The title of this week’s episode, Summer stall or AI bubble?.  Before we press onward, please take a moment to click on both the subscribe and notification bells so you will be alerted when our investment team uploads our latest content.  Or better yet, give our OHFG team a call at 877-896-0040 to speak to our team and set up an initial consultation with an OHFG advisor to discuss your personal financial situation.

The June and July rally in the SP500 returned a spectacular 9.8% with July’s 3.1% return almost double the average July of +1.7%.  Once again, here’ a table of the monthly seasonality of the S&P500 during Presidential Cylce year 3.  This data is complied by Steve Suttmeier’s group at Merrill.

Post the 1h move, we have have entered what should be 3 or 4 months of some negative monthly returns, and higher volatility at worst, or sloppy, choppy sideways behavior, a general consolidation, and “net” little to no price appreciation in the S&P 500 at best.  Since the July 27^th intraday peak of 4607.07 on cash Sp500, the SP500 has fallen back a little more than -3%.  Had you been perfect selling that top.  Which of course no one is.  The tech heavy NASDAQ composite peaked at 14446.55 on? July 19^th which was Wednesday volatility expiration. As of this writing and filming the NASDAQ has declined a little more than -5.5% had you been a prefect seller.

Here are the daily charts of the SP500 and Nasdaq.  The S&P 500 had fallen to the 50-day MVA as of this video shoot and the NASDAQ had just broken below it. SP500 daily:

NSADAQ Composite Index daily:

Do these charts mean you should “blow everything out” of your portfolio? Do you sell everything because of these technical formations?  No, not if you are sticky to a long-term financial plan. Why because the economic, federal reserve and stock market cycle work still favors us approaching our old all-time highs of 4800 later in the year and exceeding them in the 1q24.

While the overall stock market accelerated above our very short term forecast in July, pulling forward some of our expected 2023 returns into earlier months, our team remains positive on the total return outlook of the S&P 500 into year end and would use seasonal weakness in mid Sept to mid-October as an opportunity to add to stock positions.  While many other strategists, advisors, and newsletter writers, have been calling the stock markets a bubble for years, we still see good investment opportunities in the public markets.  True bubble type equity action, and its popping, in our opinion would come from higher levels in the stock markets, later in the cycle.

 In fact, if one is just a chartist, viewing equities as pictures of supply and demand, independent of valuations and fundamentals, and one looks at many of the monthly setups of some recent technology AI stocks and their moves, one might come to the conclusion that “if”, and I do mean “if” we are in an AI bubble, called it internet bubble 2.0, we are only halfway there in time and price.

Yes, you heard that correctly, if you think this is an AI bubble, you should be very careful trying to time your shorts for the big secular collapse in those and other tech names. With all the AI bubble calls going on out there, largely from strategists who missed the last 9 months move up in the markets or those who are ALWAYS bearish, I went back to do some historical research to compare what we have recently experienced to the first go round of the internet bubble which I lived through personality living in San Franciso at that time and managing money through.

So, what is ground zero for the AI bubble if we are in one?  I’d say NVDA is the poster child for the AI bubble talk and more broadly semiconductor stocks.  So, here’s a chart of the SOX semiconductor index.  The SOX index has been around for decades including back during the internet bubble.

Clearly the semiconductor group, and more specifically NVDA have been a market leader since the market troughed last October.  In fact, the SOX index rally lasted exactly 198 days from Tuesday Oct 13^th, 2022 until month end July about a month ago.  Now lets look back to the internet bubble days? I’m sure it will look quite different, yes?  No.  In fact, back then the SOX semiconductor index troughed on Thursday October 8^th  in 1998, and rallied for 194 days into? Friday July 16^th 1999 before topping and pulling back during the 3^rdquarter of 1999.  Here’s that chart with the first-time span marked below. 198 days.

However, what the bearish strategists calling this an AI bubble won’t tell you when they compare the current AI cycle to the internet bubble cycle is what happened after the normal seasonally weak summer months of August-October 1999.  Back then in the 3^rd quarter of 1999 semiconductor and the rest of technology stocks sold off from their mid-July peak into mid-August when they troughed for the 3^rd quarter and proceeded to mark time going sideways and consolidating, They went up and down from mid-August through mid-October 1999. Not making new highs, but not breaking down either.  Then what happened in the 4^th quarter of 1999 and first 2.5 months of 2000?  Well, that’s what those who lived through the 1990’s remembers about the bubble.  In November of 1999, technology stocks broke out to new highs, and over the next 4.5 months put on a historic parabolic move that put and exclamation point ending the bull market of the 90’s.

To remind investors who haven’t studied it or didn’t live through it, these were the monthly returns of the Nasdaq composite into the internet bubble peak in February 2000.  Here are the tables. The Nasdaq had gained over 125% in the year and a half leading up into peak internet bubble and included monthly returns, not annual returns, but monthly returns of 13%,10%, 12.5% 14%,12.5%, 22%, and 19%.  Toward the end of bubble like moves, stocks usually move parabolically, meaning each successive month has a higher return than the previous month until buying is exhausted and short selling has collapsed.  Look again at the SOX index chart I just gave you.  That is what a parabolic bubble chart looks like. They are a lot of fun on the way up, because every buy looks smart, and every sell looks wrong.  But they always end the same way, hardship for those who get greedy, stay too long, or don’t recognize the peak, reversal, and downward momentum that usually lasts quarters and years, not days and weeks.

Where do we stand?  It’s summer, and so far, the markets, being the SP500, or NASDAQ or SOX indexes, are acting in a very normal fashion.  Will we continue to act normally over the next few months?  Our team sees it that way.  Are we in an AI bubble that many are calling for, almost all those who missed the move up in tech stocks since last October?  I don’t know, but if it is?  History says, we are likely in the pause that refreshes and refuels the bubble, not its peak.

At Oak Harvest, we currently manage broadly diversified equity portfolios that balance risk and reward for our clients.  We don’t concentrate our clients’ funds in only one or two sectors, seeking to hit a grand slam.  We try to hit singles, and doubles and occasionally a homer if someone makes a mistake and we find a stock at the right price at the right time. For those investors who are less optimistic and risk taking, those seeking higher dividend income that grows, those investors willing to forgo some potential price appreciation in favor of lower volatility, we have a dividend growth equity model.

Those investors who are more in the optimistic camp, seeking higher long-term price appreciation which does carry higher expected volatility without the focus on dividend income, we have a Blue-Chip growth equity model. The overall tools our advisors and financial planners use are usually a combination of markets based and insurance based tools to meet your retirement goals. Our investment team is busy working on some new, and highly unique equity models, that few advisors have the experience our investment team has for our advisors to use as tools for our clients in the not so distant future. Stay tuned.  The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at 877-896-0040 and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.