The neighboring town near where I grew up has an old Missouri Pacific railroad roundhouse. It was already out of use when I was a boy, but it still fascinated me that big steam engines would be driven onto a turntable and rotated around to change directions. There are more tracks today, so it’s easier to turn trains around, but changing directions is still a big deal, maybe even more so when it’s an investment change in direction.
Global stock indexes are still reeling from four consecutive days of stock selloffs. The four-day selloff, which began on November 13th, saw the Dow fall 4.5%, its sharpest four-day decline since 1999. Investors are still jittery about whether all this investment in Artificial Intelligence (AI) will pay off in profits. It’s clear that investors are worried the AI boom that has driven markets higher this year might be running out of steam.
Chipmakers like NVIDIA have posted big losses in recent days, with NVIDIA’s shares down some 12% from their record high last month, including a 7% one-day loss. Investors are signaling uncertainty about AI stocks, prompting them to pull back some holdings and see how market conditions unfold.
NVIDIA earnings reports are coming out soon, and it has become a macroeconomic event in and of itself. Investors will not just be listening for NVIDIA’s numbers but also for clues about what is happening in the AI economy. This is because NVIDIA is seen as the linchpin for the entire AI industry. The world’s most valuable public company has lost some notable shareholders, including Peter Thiel’s hedge fund, which sold around $100 million, and the giant Japanese investor SoftBank, which sold nearly $6 billion. They weren’t just selling a few shares to take some gains: both liquidated their entire positions.
With these prominent investors pulling out of NVIDIA, it could be signaling a change in the AI trade. While we don’t know where Peter Thiel is redeploying that cash, it was interesting to see SoftBank note that it used those proceeds to fund a larger investment in ChatGPT. So, in a sense, it’s shifting some of its bets from chips themselves to actual AI applications like ChatGPT. It will be interesting to see where the money flows are going in the AI trade and which stocks benefit. This could very well be the beginning of a change in investment direction away from chipmakers toward more applications. The AI trade will no doubt continue, but we don’t know which direction it will take.
This latest round of pullbacks might be investors trimming their bets in the lead-up to NVIDIA’s earnings. Although it could be the beginning of investors redirecting towards applications.
With the bar set especially high for NVIDIA’s earnings, anything less than a stellar report and strong future outlook could cause big swings in the markets. It will need to prove to investors that they are essential not only as chipmakers but also to AI applications. Their stock and the AI industry will be riding on its report.
Another interesting thing about that town and the roundhouse is that nearby, trout fishermen from around the world come to catch the elusive McCloud River redband trout. The railroad men in the late 1800s carried some of these unique California trout in milk jugs. However, when the train broke down over Crane Creek, the workers threw them over the bridge before they died. So, because of these events, you can now find McCloud River trout not only in California, but also in the small town of Crane, Missouri.
Sometimes good things happen when you don’t change direction too often. We will see if something similar happens when investment directions change.
Have a blessed week!
Richard Baker
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.