Stocks have experienced a remarkable surge this year, despite unfavorable circumstances such as soaring interest rates, declining earnings, and the depletion of pandemic-related savings. Surprisingly enough, the introduction of error-prone artificial intelligence chatbots appears to be the only positive factor contributing to this upward trend.
According to Bank of America strategists led by Michael Hartnett, this phenomenon of asset price overshoots is becoming the “new normal.” Let’s take a closer look at some examples:
Oil: In April 2020, oil prices plummeted to an unprecedented -$37, only to skyrocket to $123 in March 2022 before dropping down to $67 within the subsequent 12 months.
Bitcoin: Starting at $5,000 in January 2020, Bitcoin experienced a rapid surge and reached $68,000 in November 2021. However, it faced a significant decline, falling to $16,000 a year later. Currently, it has recovered slightly and stands at $29,000.
The S&P 500: Over the course of the 2020s, the S&P 500 witnessed several fluctuations, moving from 3300 to 2200, then climbing to 4800 before settling at 3500. In the most recent development, it has surpassed 4600.
Evidently, AI has played a crucial role in driving these overshoots, something that cannot be overlooked.
Despite ongoing uncertainties, the S&P 500 has managed to achieve an impressive 18% gain this year. Meanwhile, the Nasdaq Composite has outperformed with an astonishing rally of 34%.
Hartnett and his team have also pointed out some concerning indicators for the economy. Real retail sales, when adjusted for inflation, have experienced a year-over-year decline of 1.6%, a trend that has historically been associated with recessions since 1967. Furthermore, a fall of over 3% in real retail sales is typically correlated with severe recessions.
Additionally, a 2-3 point increase in the savings rate is often indicative of an impending recession. Currently, the savings rate has risen from 3% to 4.6%. Although the unemployment rate has not seen a significant rise so far, a 0.5 to 1 point increase in the jobless rate typically signals an approaching recession.
Considering these factors, Hartnett and his team foresee the possibility of the economy hitting a major obstacle just as the concept of a “soft landing” by 2024 gains traction. For investment strategies, they recommend exploring emerging markets and commodities for potential summer upside plays, while cautioning against credit and tech investments as autumn downside plays.
