@theMarket: Bellweather Stocks Fail to Support Markets

As February ends, most stocks have gone nowhere. March tends to be better, closing higher 64 percent of the time. We can hope things improve, but hope is never a good investment strategy.

 

The carnage in the technology sector continued. While reporting stellar results, Nvidia, the AI semiconductor giant, failed to impress investors. Anemic bounces in other areas, such as software, did little to alter the mood. The market's schizophrenia continues.

 

About the only good thing one can say is that markets have held in there despite the technology sell-off. If you were fortunate or savvy enough to own stocks in emerging markets, precious metals, copper, energy, industrials, or small caps, your performance has been much better.

 

As I wrote last week, the Supreme Court ruling on Trump's tariffs was largely priced into the market. It offered only a day or two of volatility. Since then, the administration has faced more than 2,000 tariff refund lawsuits. Many fear their refunds will be delayed for a long time.

 

Markets soon returned to the threat of AI. "Threat?" you may say, what happened to AI, the linchpin of future productivity that has fueled all the buying over the last two years?

 

The narrative has changed. Today, it is all about fears that breakthroughs in artificial intelligence will affect companies' terminal values. Investors are fretting over whether AI will spell the end for certain industries and companies, or just cause widespread disruption. How much will software companies be worth ten years down the road? That is called a company's terminal value. Putting a number on its long-term worth is nigh on impossible. But that never stopped Wall Street from guessing.

 

This week, IBM's stock price crashed after Anthropic announced that its Claude Code tool could automate the modernization of COBOL systems on IBM mainframes. This business is core to Big Blue, and just the threat had investors dumping the stock. It was the steepest price drop ($31 billion) in more than 25 years for Big Blue.

 

Investors are seeking companies supposedly immune to AI disruption, yet few are truly immune to this trend. Sure, you still need trains, trucks, and airplanes to transport, or picks, shovels, and equipment to extract gold or silver, but creating an investment case based on this thinking makes little sense to me.

 

In every industrial revolution, massive changes have triggered fear. Fear of lost jobs, of a great uprooting of lives, of social disruption. In some cases, traditional processes fall by the wayside or evolve into something new and beneficial. It takes time to parse out these changes. It can't be accomplished in a week or a month.

 

Emotions are running high right now, but calmer heads will prevail. The truth is that the financial community almost always needs a story to justify price movements, no matter how far-fetched. Why not just accept that the entire technology sector, after a three-year run, needs a period of profit-taking and consolidation? In the meantime, sectors that have been ignored until now are having their day in the sun.

 

Cryptocurrencies attempted a bounce this week, but it was short-lived, while gold, silver, copper, etc. have been in a trading range. The biggest winner of the court's tariff turndown has been emerging markets. Given that they were hurt the most by the levees, their bounce back makes sense.

 

As we enter March, I am expecting this volatility to continue. My feeling is that markets need a trigger (up or down) to break this trading range. It could be conflict in the Middle East, or peace. Some hoped the State of the Union address might enliven buyers, and it did for one day, but profit-taking quickly ensued.

 

I advised readers to focus on the 6,900 level on the S&P 500 Index. Above it, positive; below it, negative. This week, we have had four days below and one above. That is called volatility. Expect more of the same.