Do you have a 401(k)? Well there’s a “good chance” the money is invested in AI stocks. This introduction was the empty warning forming the premise of a Marketplace story describing the AI-driven risks in the average investment portfolio. The accompanying interview with Boston College law professor Patricia McCoy, who studies financial regulation and consumer financial protection, demonstrated how otherwise informative market commentary can fall short of delivering news that matters.
Professor McCoy is “concerned” about the level of AI exposure in an index like the S&P 500 (SPY). She worries about a range of risks: companies may miss their earnings targets, cash needs could become “too massive”, and demand may not materialize. If these risks unfold, then investors may withdraw their money from their AI-exposed investments. McCoy lamented that it is difficult to avoid this investment exposure because of the construction of the S&P 500 index and the increasing bond offerings and loans funding the AI infrastructure buildout.
However, McCoy offered no actionable advice for anyone who shares her concerns. She even failed to provide a sample of ETFs or indices with little to no AI-related exposure. Instead, she offered as a recommendation that the SEC needs to think about risk management and enforce transparency…as if such SEC action would redirect 401(k)s away from AI-related risk. When interviewer Kai Ryssdal asked “Let’s bring it back to you and the moms and pops and all those people exposed to AI…what are you going to do?… Are you just riding it out?”, McCoy responded that she is riding it out. Thus, her actions reveal more about her concerns than her words. Her own risk management is generic advice for aligning investments with life phases, advice completely independent of sector-specific risks. As an older investor, McCoy is keeping three years’ worth of cash and the rest in stocks and bonds. She offered nothing actionable.
I understand the dilemma. Such experts talk about the market, but they are hesitant to offer direct investment advice. They are particularly loath to recommend sales (like purge all your AI stocks now!) because being wrong could undermine their standing as an expert. However, they do not recognize that failing to act in accordance with their words undermines the significance of what they have to say anyway. When finance experts stick to the generic financial planning script, like maintain a diversified portfolio or invest in quality companies, they basically tell us that financial and business news is irrelevant to long-term investors. Ironically, Marketplace reduces its relevance by conducting such interviews even as they think they are doing the audience a service by having these experts opine about the latest market dynamics.
A better approach for outlets like Marketplace is to stick to reporting the news. Raising alarms about investment risks without offering ways to evaluate or manage those risks does little to inform investors. Without actionable insights, such interviews provide commentary that falls far short of providing guidance.
The Topping AI Trade: VistaShares Artificial Intelligence Supercycle ETF (AIS)
Having said all that, I have concluded hat most of these AI-related stocks have topped out. For example, the VistaShares Artificial Intelligence Supercycle ETF (AIS) broke down below support at its 200-day moving average (DMA) (blue line) for the first time. I bought AIS for the first time last week looking for 200DMA support to hold. Now, I face stopping out if AIS closes below its Situational Awareness low from July before a relief rally ensues. Going forward and until the technicals of these stocks invalidate their topping patterns, most AI-related stocks are trades, not investments. AIS will first invalidate its topping pattern above $80 where it last peaked in early October. That point is the second part of a double top drawn by the purple curves below.
Be careful out there!