Any company that has implemented AI has seen its stock price appreciate. Computer chip maker Nvidia (NVDA/Nasdaq) emerged as the leading AI chip maker and iss reaping the rewards of the AI boom with soaring earnings and share prices. It’s not alone. Google and Microsoft are also experiencing turbocharged earnings thanks to the use of AI in their products.
Are the stocks of these expensive companies worth considering buying? Yes, and I’ll tell you why. Technology is one of the few industries in significant growth mode, and it’s growing because of AI. If you are OK with medium risk and volatility, it could be worth paying a premium to add growth stocks to your portfolio, if that aligns with your risk and goals.
Hedge fund exposure to mega-cap technology stocks just crossed 30% for the first time in history.
There has never been more hedge fund exposure to large technology stocks.
Institutional money really believes that AI is the next big thing.
Will AI live up to the hype? pic.twitter.com/6FwDbImy8T
— The Kobeissi Letter (@KobeissiLetter) August 30, 2023
Many investors are looking for companies that were already worth owning before they started using AI. For example, Google was solid to own before it incorporated AI into its search algorithms. Same with Microsoft and Nvidia. Right now, I have my eye on Amazon, Google and AMD, which has announced it’s developing an AI chip that is less expensive than Nvidia’s. Oracle is another company within this category. (Read: The “Magnificent Seven” stocks dominating)
How the seasons impact markets
Historically, September and August have proven to be the worst and second worst performing months, respectively, for the markets. We’re not talking doom-and-gloom, double-digit downturns, but returns are either negative or breakeven. So, not great.
Why’s that?
In addition to what’s happening with the economy and monetary policy, seasonality can also move stock prices up and down. July tends to be strong, setting us up for a weaker August, when people take some profits off the table. Trade volumes are also typically down by half in August as people enjoy the last few weeks of summer. Fewer active traders in the market can cause prices to fall. Conversely, more traders in the market can lead to higher prices.
In Canada, the markets start to rebound and pick back up in mid-October and end with a strong November and December. I think if we can get through the next six weeks stable, flat or slightly up or down, that would be a win as we head into what is hopefully and traditionally a good time of year for investors.
January brings its own energy: the January effect. As go the first two weeks of January, so goes the rest of the month, and so goes the rest of the year. January sets the tone for the next 12 months. More often than not, when the markets are positive in January—which has been the case about 75% of the time—the rest of the year is positive. This year in particular January was fantastic for the markets. The Nasdaq was up 10.7% (its best January performance since 2001), the S&P 500 gained 6.3%, the Dow added 2.9% and the Russell 2000 rose 9.7%. This bodes well for November and December.
Of course, the fact that we are used to seeing certain trends happen at specific times in the year can lead us to expect them to happen again and then that expectation becomes self-fulfilling.
Allan Small
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