Daily Commentary

MarketMinder’s View: This is a good documentation of several firms’ efforts to use AI in crafting an investment strategy, and it speaks to a simple point: The technology to beat the market doesn’t exist yet, and there are reasons to think it isn’t close. “The irony of investors’ piling into AI is that the technology has for years struggled to crack the actual business of investing. Machines get bamboozled by noisy markets and can be caught off guard by fickle trends, and finance—surprisingly—sometimes lacks the oceans of data that underpin the technology in other domains. A Eurekahedge index of 12 funds using AI has trailed its broader hedge fund index by about 14 percentage points over the past five years. According to Plexus Investments, an asset manager that tracks the returns of boutique AI funds, only 45% outperform the benchmarks they measure themselves against.” As the article documents, the firms trying this largely attempt to employ quantitative (“quant”) investing strategies—those that rely on data signals to make decisions—yet such approaches are no more successful than non-quant strategies. And, “… [T]here are big hurdles, not least that market trends and investor behavior might hold for months or even years but do a U-turn in an instant, making whatever the machine has learned suddenly irrelevant.” Markets are complex adaptive systems, and once everyone (including AI machines) has “learned” something, it loses its power. And then there is the small matter, not covered here, of reports showing AI getting worse with math and logic over time. Maybe someday AI will run portfolios successfully, but for now, the technology seems useful mostly for simplifying or streamlining various processes that are pieces of the investment management puzzle, like operational matters.

MarketMinder’s View: This morning, the US Bureau of Labor Statistics released August’s Job Openings and Labor Turnover Survey (JOLTS), which showed employers had posted 9.61 million “help wanted” ads nationwide, up from 8.9 million in July and above forecasts. This is all spurring loads of speculation that labor markets remain too tight, which many think risks a wage-price spiral that drives inflation up further and forces the Fed to hike rates still more. But there are many reasons to doubt this conclusion, quite a few of which are shared here. “Actual business hiring was basically unchanged in August, rising to 5.9 million people hired. The hiring rate was stable at 3.7%. The number of people who were laid off or quit was also flat in August. Moreover, the job openings number frequently displays volatility that doesn’t seem to align with any underlying economic change. The rubber-meets-road indicators around actual hiring and layoffs are more stable.” The JOLTS report uses a relatively small sample and is subject to loads of volatility. But even beyond this, it is worth noting that we have no idea what data the Fed is or isn’t weighing in its decisions to hike. One sure hopes it isn’t JOLTS, not because rate hikes are terrible for stocks (they aren’t), but because the link between jobs and inflation has been debunked—both in theory, by Milton Friedman, and reality by, you know, data. We have seen inflation cool markedly over the past year-plus while job markets remained tight and wages rose.

MarketMinder’s View: Take all long-term forecasts and such with a grain of salt, but this one seems like the counterpoint to the often-touted fear that Social Security won’t be around for future generations without reforms. (Note: Virtually no one ever talks about reforming Social Security for current beneficiaries or those soon to be eligible, so the worry is generally, when properly cast, about future recipients.) This article documents a structural change in Americans’ retirement savings, which stemmed from increasingly common 401(k)s and default savings features. “While the generation born in the 1980s and 1990s has lagged behind prior generations when it comes to homeownership and earnings, new data suggests they are saving more for retirement. By the time older millennials now earning a median salary reach retirement, Vanguard estimates, they will be able to replace almost 60% of their preretirement income with Social Security and savings from sources including their 401(k)s and individual retirement accounts.”