Mid-terms & AI Weigh On Markets
Heavy selling in tech stocks as politicians indicated incoming restrictions on AI pulled equities down last week. Mid-term election results last week showed that Democrats
were successful in taking control of both houses of Congress. When the new Congress takes over next year, it will likely mean a gridlock in Washington, D.C. Equity markets typically prefer gridlock in government, but a key platform upon which Democrats campaigned caused a stir in markets last week. As politicians indicated regulations could be incoming on AI data centers1, the Nasdaq 100 Index declined more than 6% on Thursday and finished the week down more than 4%.2 Regulations to curb data center build-out at the state and local level could dampen the outlook for AI-related stocks in the immediate future.
Meanwhile, there appears to be a disconnect between institutional and retail investors. Hedge Funds appeared to be deleveraging leading up to mid-term elections. The week
prior to elections, the largest de-grossing occurred among global equities since they started keeping the stats in 2016.3 At the same time, retail investors appear to be in risk-on mode as October saw the largest flows into leveraged ETFs on record.4 In fact, after Thursday’s sell off last week, daily flows into the 3x leveraged semiconductor ETFs saw their 2nd largest daily flow in history.5 It would appear that “buy the dip” investors are still committed to buying “growth” equities for the time being.
Meanwhile, the bond market is starting to provide some potential warnings about what is going on in equity markets. Yields fell across most maturities last week as flows came
back into higher-quality bonds while high yield bonds faced more distress.6 Intermediate core bonds held up better last Thursday during the selloff as the Aggregate Bond sector has moved higher for 5 consecutive weeks after moving lower for 5 consecutive weeks.7 At the same time, credit default spreads for AI-related companies continued to rise as investors are purchasing more insurance against further downside risk in AI.8 As we have noted many times over the past few months, now is a good time for investors to review their risk tolerance and make sure their portfolio allocation accurately matches their expectations.
Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
References to specific securities are for illustrative purposes only and are not recommendations.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
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