Thus ends another remarkable month, where ETFs specializing in certain niches of technology related to Artificial Intelligence (AI) build-outs gained over 20%, and certain companies in this sector more than doubled. I’m not going to try to tell anybody when and from what price level this is all going to end, but I do want to say that there is a significant amount of “froth” in the market right now, and history strongly suggests that this won’t end well:
1. Speculators no longer feel the need to hedge their positions.
If the market isn’t going to decline, why bother to hedge against a decline? Put buying is usually strongest near market bottoms and weakest at tops.
2. Money market “dry powder” is very low because investors are “all-in”.
Only a little over half of the sub-sector ETFs I track rose in May, but the winners gained on average 3.5 times as much as the losers lost. That disparity is why U.S. stocks as a whole were up 5% on the month. Utilities, energy, consumer staples, and financial services stocks lost money last month and real estate was about flat. Gold and bitcoin were also lower. If the tremendously upbeat narrative about AI were to break down (not that I expect it to), the rest of the market would struggle to pick up the slack. The biggest threat to the stock market in the short run, oddly enough, is that the IPOs of SpaceX, OpenAI, and Anthropic suck the liquidity out of the rest of the market (especially other tech stocks). It should be noted that Goldman Sachs went public in May 1999, just 8 months before the internet bubble began to burst, Blackstone went public in June 2007, just 4 months before the real estate bubble peaked, and Glencore went public in May of 2011, less than 4 months before gold peaked. Each of these crashes was greater than 45%. Just sayin’.
Bonds ended the month of May on a bit of a high note, as investors shrugged off some modestly higher than expected inflation numbers and focused on the GDP revisions which showed the economy grew at a slower pace in the first quarter than previously thought. At mid-month, investors had priced in a near certainty of an interest rate hike by the end of the year; that prediction looks a little “iffy” now.
The bond market is also saying that rising interest rates might be a concern, but a credit collapse is not. This is positive for private credit and high yield corporate debt.
For whatever reason, oil prices still decline whenever it is reported that the U.S. and Iran are close to a deal to open the Straits of Hormuz. Fool me once, shame on you; fool me forty-five times … I would take the opposite side of the bet.
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