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: Once again, we remind readers MarketMinder is politically agnostic, preferring no party or politician over others. Our commentary serves only to assess political developments’ market ramifications. As the headline hints here, sentiment is souring on Japan over Prime Minister Sanae Takaichi’s investment plans and, allegedly by extension, the country’s weak yen and rising yields. As one former Bank of Japan board member diagnoses the situation: “The administration faces two big headwinds: slumping approval ratings, and declines in yen and JGBs caused by eroding market trust in its fiscal policy. ... To recover market trust, the administration needs to show with specific facts and figures its focus on fiscal discipline.” But as we wrote earlier, Japan has no problem servicing its debts and the yen’s downswing isn’t out of step with historical norms. Yes, the yen is the weakest against the dollar in 40 years, but it had been a whole lot weaker before—including some go-go years during the early 1980s. Besides, Japanese markets have been fine with a weak(er) or strong(er) yen. All the handwringing to us looks like an easy bar for reality to clear. For more, please see Monday’s commentary, “Takaichi Raises Japan’s Wall of Worry.”