@theMarket: AI Implodes; Markets Wait & See What Midterms Bring

Looking at the week overall, markets continued to march in place as midterms approach. However, that doesn't mean traders sat on their hands all week; far from it.

 

"Third-quarter earnings better be good," was the focus of one of my last columns. For Alphabet and some other AI tech stocks like Intel and Amazon, it was a disaster. Alphabet missed earnings. As a result, the stock dropped almost 13 percent on Thursday. That means it lost about $500 billion, the second-biggest one-day wipeout ever for a U.S.-listed stock.

 

And given that AI has become a global trade, Google's results drove down Asian equities as well — anxiety over the AI supply-chain trade spread across the region. As readers realize by now, the bloom is off the rose and has been for the entire AI equity universe recently.

 

As with most declines of this magnitude, I expected a dead cat bounce trade. We got one over the first three days of this week, in anticipation of home-run results from Microsoft and Google after Wednesday's close. The entire AI space rallied from an oversold position.

 

While Microsoft beat, it just wasn't enough to make up for Google's poor showing. The only index that wasn't down on Thursday was the small-cap Russell 2000. Friday, Amazon and Intel reported. They joined the rest of the AI gang in its downward spiral, dragging the indexes down.

 

 Over the past few weeks, I warned investors of the precarious nature of the AI trade. For those asking, I publish two columns each week — one on weekdays and another on weekends. If you have not read my last two weekday columns on AI, you should, because where AI stocks go, so does the market.

 

The FOMC meeting on Wednesday was almost an afterthought. As expected, the Fed held rates steady and offered few clues about what to expect at the December meeting. On Thursday, the government released two important data points. The Personal Consumption Expenditures Index (PCE) rose to 3.6 percent annual inflation, and GDP grew in the third quarter at an annualized rate of 3.4 percent. Credit the AI buildout for much of that growth.

 

As a government data cynic, I am not surprised that the GDP number was higher than expected less than a week before the elections. As for the PCE, the Fed's supposed primary inflation gauge, I was looking for a 3.8 percent increase, so I was a bit too high. However, readers may recall that the PCE tends to understate real inflation growth after recent changes were enacted last month.

 

Despite AI stocks imploding, the indexes remain somewhat stable, except for the Nasdaq. The reason for this is rotation. As technology stockholders sell, the money isn't going to cash. Instead, it's flowing into health care, utilities, financials, Treasury bonds and consumer staples.

 

This coming week will be eventful. Politics will be front and center for the first half of the week. We know that uncertainty is the bane of most markets. So far in October, markets have held in place, however, with many investors counting on the removal of this big question mark to spur the indexes higher.

 

I reserve judgment until I see how both parties respond to the election results and how investors react. If it is a close race, we may not know who won what for another month if individual races are disputed. If the Democrats manage a clean sweep of both houses, markets could sell off. If it is a mixed result, history says that could be somewhat positive since little would change. If the polls and betting markets have it wrong (remember that Trump always under polls) and the GOP prevails, well, prepare for even more changes ahead, good and bad.

 

In closing, I want to advise readers that this will be my last column until the third week in November. Yes, I am taking some time off, three weeks to be exact. It is my first real vacation since 2020. They say absence makes the heart grow fonder. It must be true because I already miss you.