AI Stocks Are Flying, but Don’t Call the Craze a Bubble
Nvidia, other tech stocks have added billions of dollars in market value
By Charley Grant, The Wall Street Journal, May 26, 2023
The rapid rise of generative artificial intelligence has created a frenzy on Wall Street, but investors and strategists say the rush to profit from the new technology isn’t necessarily a bubble.
Investors are piling into shares of big technology companies—such as Nvidia, which soared 24% Thursday—that are perceived to be leading in the nascent field. They are pumping cash into private startups working on generative AI, or systems that can conjure humanlike conversation and imagery and generate computer code…
The S&P 500, which is up 8.1% in 2023, would be down for the year without the contribution of the eight largest tech stocks. …[end quote]
For some light summer reading, I recommend “Manias, Panics and Crashes” and “This Time is Different.”
Yes, Virginia, there really is a Santa Claus! Jump on the band wagon along with all the other speculators!
At this moment, Nvidia stock sports a P/E ratio of 199.5.
A market whose only growth is concentrated in high P/E ratio stocks which attract speculators due to forecasts of future earnings in a new technology is an absolutely classic bubble. If it’s a “craze” it’s a bubble!
Wendy is the last person who will give in to FOMO/Crazo/ Bubblo…One reason I always come here…
I did not sell my very small small of NVDA shares, as I like to see the only green I have in my portfolio…More for psychological gain than financial gain.
But yeah, Bubble or not, I like to see the positive side of market going up - HATE THE LAST 2 YEARS!!!
@Inspired2learn a bubble is like a game of musical chairs. You can hold while the music is still playing but it’s hard to know when the music will stop.
I would have agreed with all this, until a few months ago. Large Language Models and generative AI are, quite possibly, the Killer App that the Nvidia CFO has recently mentioned. It’s like another spreadsheet moment (the original killer app, decades ago). Six months back I would have told you Chat GPT was still YEARS away from being a reality. Ditto for MidJourney. But here we are.
@bjurasz you may be right. But does that justify a P/E ratio of 200 and rising?
History shows, over and over, that investors get excited at the beginning of a new technology (or land discovery or mineral discovery, etc.) and pump up the value of the stocks WAY before profits arrive to justify the price. Often, the bubble collapses and the original investors are wiped out before the technology, resource, etc. is developed…and the profits are reaped by a later wave of investors.
One example is the build-out of optical cables to carry the World Wide Web. Many people don’t remember how the original stock and bond holders were wiped out in 2000 - 2001. We take the finished product for granted.
This bubble dynamic dates back to the early 1700s. Even Isaac Newton lost money in the South Sea Bubble.
I’m not disagreeing with the thesis that AI is at the start of a great technology that may develop well into the future (a “killer app”). I’m just saying that the market’s response is absolutely typical of a classic bubble dynamic where speculators can lose a LOT of money. Both those statements can be true.
AI certainly could have its sock puppet moment, and I do worry about that. Not enough to sell at the moment. But the Internet did recover and dominate after its crash. The question in my mind is, did we already have our head fakes over the last 5-6 years, or is one more still brewing?
If we do have a sock puppet moment in our future, before the eventual rocket ship, I think we have another year or two before the crash.
An honest question given my inexperience…Did the last recession feel anything like this before it stuck?
I hear that normally the stock market bottoms more than 6 to 8 months before the actual recession is officially announced, as the official announcement by the NBER is usually retrospective…
Regardless, I just wanted to ask …was the last recession also this anticipated/ predicted??
Charlie they are all different. Look at 2020, straight down then back up. 2009 seemed more like this but that was even worse, but this one they are raising rates into the recession trying to cause it. If anyone tells you that they know what is going to happen, well they don’t. Because if they did they would own all of California or Hawaii or maybe both.
@Inspired2learn each recession is different. Here are the recessions I personally remember. I am linking an inflation-adjusted S&P 500 chart (SPX) and also Real (inflation-adjusted) GDP showing recessions…
1973-1974. OPEC raised the price of oil causing inflation. The economy slowed. The result was “stagflation” – a dispiriting combination of inflation and economic stagnation. SPX fell between 1970 - 1982. There were bear-market SPX recoveries that bounced up but ultimately failed. SPX fell between 1974 and 1980 even though GDP grew and there wasn’t a recession. I’m afraid that our current situation resembles the 1970s stagflation more than any other recession.
1980-1982. When the mild 1970s Federal Reserve policies failed to control inflation, Fed Chair Paul Volcker raised the fed funds rate to 18%. That caused the severe recession with unemployment over 8% for a long time. The SPX fell to the lowest level in decades but afterwards recovered. Fed Chair Jerome Powell admires Volcker and there is a chance that Powell will continue to raise the fed funds rate if inflation continues. The current fed funds rate, 5.0% - 5.25%, is barely restrictive compared with inflation.
1990-91. This recession followed the first Gulf War. It was a classic economic recession without a special personality. It wasn’t caused by a specific crisis.
2001-2002. This recession followed the collapse of the dot-com stock market bubble. It was similar to today’s situation since it was a bubble-bust situation. But the recession was shallow. The SPX eventually recovered but many dot-com companies failed. The Fed cut interest rates to stimulate the economy. This led directly to the housing bubble in 2004 - 2007.
2007-2009. The Great Recession was caused by the collapse of the financial instruments that inflated the housing bubble after the Fed raised the fed funds rate in 2004 - 2006.
The Fed held the fed funds rate at zero, plus adding Quantitative Easing, until 2016. The Fed then began to gradually raise the fed funds rate to a more normal level. (The real, inflation-adjusted rate had been negative.) The stock market had a bit of a hissy fit in 2019 and the Fed backed off somewhat.
Then Covid hit in 2020.
The Fed dropped the fed funds rate to zero again and provided more lending support as never before. Most of this monetary support went into the asset markets, not the economy.
At the same time, Congress provided a HUGE wave of fiscal support that went directly into consumer pockets.
The combination of monetary and fiscal spending led to inflation in 2021 - 2022. This was predictable.
The Fed has been raising the fed funds rate to try to control inflation. But that’s a slow secondary effect. They are trying to induce a recession to slow consumer spending. It hasn’t happened yet. If and when a recession happens we can expect the SPX to fall.
Looking at BLS figures, job creation 1970-2000 was virtually a straight line that ended with 60-million additional jobs over 30 years, or about 2-million jobs/yr regardless of party controlling govt/Congress.
Starting in 2001-2002, the economy essentially flatlined for most years until 2009 (a few outliers 2005-2006?)–no new job creation (BLS). One side claimed “all those people went to work selling stuff on Amazon, eBay, etc” so they do NOT show up as employed. Of course, that was nonsense and there was never any documentation to support such a claim from any source.
This was pretty much the end of supply-side economics. Obama moved the economy to demand-side economics and things took off. It lasted the rest of his Presidency and carried into his successor, who tried to claim he did it. No way was the claim even fundamentally credible. This was proven during the years of Covid. Then Biden took over and he began moving the economy further into demand-side economics. Job creation now is essentially “off the charts” and the Fed is frustrated at how strongly it keeps growing. I remember Burger King (in 1998?) (and others as well) looking for assistant managers (think 17-yr-old) at $10+/hr. Worker shortage then due to the Internet. Today, they offer $20+/hr and there are no takers.
THAT is the fundamental difference at the moment. A recession will have some impact. But how it will play out regarding the work force (and everything else) depends on factors we do not yet know.
To this quote…the thing this board is not following is how the infrastructure spending is going.
We have followed tech for so long we are neglecting heavy industry outside of the car and EV industry.
The point is money is flowing that is holding up this economy.
The market is a different matter. Unemployment rising in possibly 4Q23 would be another matter. The future though is in that infrastructure spending.
The federal infrastructure spending has a larger impact in another way. The state budgets have greater leeway to affect the prosperity of each state. To the seniors against federal spending this will mean longer term your state and local taxes can come down.
The gray verticals are the recessions.
Do the market bottoms appear to happen 6 to 8 months before the respective recession?
Your comment "official announcement is … retrospective " is the answer.
I bought my first stock in Sept 1999.
I’d been “paper trading” for a couple YEARS, with the old TMF system.
YES! The next recession, the “bubble run up” all that was loudly, stridently “anticipated”. I finally capitulated and bought. Just in time for March 2000.
In 2007-08… We were warned REPEATEDLY that the crash was imminent, that “bubble” was happening. @WendyBG and @Goofyhoofy both reported they were going “risk off”, so I followed them, moved partly into cash, and sorta successfully “timed” the market.
The two years prior to 2020 were filled with a cacophony of “due for a market crash” warnings.
So, IMO, yes, there are always sages who anticipate the next crash. If you watch the market closely, and listen to to the cacophony, it can be quite stressful.
Good luck.
Build an emergency fund, have 0 debt, and keep investing.
NBER tends to officially announce that there was a recession after the bottom of the market is already in …
And we have had quite a serious downdraft since Dec 2021…and then the partial recovery in the indices…So, secretly, I was hoping that come Dec 2023 OR even Mar 2024, NBER may announce that the recession began in Jan 2022…And I believe the NBER announces the end of recession on a separate announcement too…and so, may be they will come out in July 2024, and say the recession ended at sometime in late 2022 or may be 2023… Is this scenario too farfetched? For example, is there no way that the NBER can announce that 2022 or even 2023 is a recession, since unemployment is still so low?
But like everyone has said, the headwinds are still there, like persistent inflation…and so, I do agree that the volatility will return for sure…and will take down the market quite a bit…BUT
And I have always had this question - what if the market rallies another 5 or even 10% from here; And then the market does a steep 10% fall; Would that be considered enough to say that the market has corrected, and the recession has been achieved and recovery already on its way ( when in reality, we may be no different to where we are today, except that the uncertainty would have been removed, and like Jim cramer says everyone officially have the blessings to “buy, buy, buy” ?
Overall, wishful thinking…but wanted to see if there is any possibility for such a scenario happening?
