Daily Commentary

MarketMinder’s View: This article tackles fears that an AI bubble popping would look like 2000’s or 2008’s respective downturns. “Many are inevitably drawing parallels with the dotcom crash a quarter of a century ago, when the Nasdaq plunged by 75% and took 15 years to recover. What might be most unnerving now about that crash is that it was so severe even though the root cause of the frenzy, the internet, completely changed the world. Fast forward to today, and this suggests that an investor might be right on AI over the long run and still lose their shirt. But 2000 was nothing compared to the 2008 Global Financial Crisis, and some more high-octane voices on financial social media are claiming that the AI crash they say is inevitably coming could rival or even exceed that credit crunch.” As this points out, though, while there are isolated bear markets in semis and South Korea, broader markets remain mostly sanguine: “The Dow and S&P 500 are only 1% and 2% below their all-time highs, respectively, and the Russell 2000 small cap index is up 20% this year.” Same goes for global indexes like the MSCI World. While we don’t buy the valuation argument here—that valuations’ being lower than in 2000 is reason to dismiss bear market fears—it is true “[m]any ‌companies in today’s ⁠line of fire are highly profitable, established firms—a far cry from the unprofitable online newbies that drove the dotcom boom.” We also agree a repeat of 2008’s global financial crisis is unlikely but see some flaws in the article’s reasoning. Yes, corporate and financial leverage is nowhere close to 2008’s, but “toxic” assets tied to real estate weren’t what caused the meltdown. Rather, an accounting rule that treated many (perfectly fine) assets as if they were toxic—alongside the government’s haphazard response—turned a correction into a bear market. Regardless, that isn’t the case today. All the “fighting the last war” here highlights a bit of a sentiment reset, implying the bull market still has wall of worry to climb.

MarketMinder’s View: Gridlock is frustrating for voters, but for markets, a government that can’t do much is an underappreciated market tailwind. Since this is inherently political, please note MarketMinder is nonpartisan, favoring no party nor any politician and focusing solely on legislative developments’ market implications. As this article lays out, Senate Majority Leader John Thune will have his work cut out for him the next two years as his Republican party likely loses ground in midterm elections. Either through the return of traditional split-government gridlock or ongoing intraparty infighting (on display over the last year and a half), “[g]etting anything done will be close to impossible.” Although political inaction may annoy politicians’ constituents, markets often do great with do-little governments in America—and abroad. When the rules shift frequently, it becomes difficult for businesses to navigate and plan ahead. The more uncertain the legal and regulatory landscape, the more it can discourage risk taking (and investment) as they await clarity. Beyond that, congressional changes invariably create winners and losers and, psychologically, losers tend to feel pain at more than twice the level of winners’ equivalent gain. The status quo may not be to everyone’s liking, but for markets the “Midterm Miracle” is music to their ears. Q4s of midterm years and their next two quarters are among stocks’ most consistently positive for this reason.

MarketMinder’s View: This piece, which dives into UK tax policy under new Prime Minister Andy Burnham, is a little confusing to read because it has been updated several times with rather conflicting information—and it is one of many from a range of publications that read this way. So let us cut through this and clarify for readers, given inheritance taxes are a major, sensitive financial planning issue in Britain—and proposing changes will likely ruffle many feathers. First, note this is an inherently political issue, so remember we favor no party nor any politician. With that out of the way, here is the deal: As we expected, many are busy poring over past comments and policy proposals from Burnham’s time in Gordon Brown’s government years ago to try to divine policy direction. Monday, he was asked about reforming the current inheritance tax—technically, a 40% tax on estates valued at over £325,000 but with exemptions for parents passing property to children that can lift the baseline to £1,000,000 (or £2,500,000 for family farms). Instead, the talk was of installing a universal, unavoidable 10% death tax on all estates—something he mentioned years earlier as a means to fund the UK’s National Health Service (NHS). NHS needs funding now, so he was asked about making this change as a means to drum up revenue—and he didn’t shoot that notion down. Headlines immediately touted this as a sign that change was coming, triggering a furor. Today, a day later, he has outright denied this policy was under consideration. What this largely looks like to us is the UK government doing what UK governments do: Floating a trial balloon in the press regarding possible policy changes, gauging the sentiment impact and then walking the plans back. This is why it is such a mistake to presume prior talk of any kind—from years ago or even days ago—is an ironclad indication of where policy is going. In politics, talk is exceptionally cheap. Wait for action.