The stock market rallied in the first quarter, fueled by a healthy economy, easing inflation, and excitement around artificial intelligence (AI). Even amidst this sunny market, however, we always keep a watchful eye for storm clouds.
Watching for risks
With that in mind, here are the primary risks we see on the horizon:
An AI frenzy: There are signs of euphoria in certain technology sectors. Anything related to AI is being bid up, with some companies trading at price-to-sales ratios of over 30 times. Historically, such exuberance led to sharp corrections, such as the NASDAQ’s -77.9% plunge when the tech bubble burst in 2000. It took 15 years for the NASDAQ to recover its 2000 peak.
A slowing economy: Potential early signs of an economic slowdown, including rising unemployment and deteriorating consumer confidence, need to be monitored. Unemployment ticked up to 3.9%, which is still low but moving up.
A second wave of inflation: While inflation is continuing to trend down, many price trends remain sticky and could reaccelerate—similar to the second wave of inflation in the 1970s.
The election looms: Regardless of your political affiliation, elections bring the one thing markets hate—uncertainty. Watch for increased volatility as we approach November.
Investing for risk-management and growth potential
Thankfully, we see a solution that addresses all of these risks: low-volatility, high-quality value stocks. As a group, they’re trading at a discount to the broader market and offer several advantages, including:
Defensiveness in downturns (low-volatility stocks walked right through the tech bubble burst in 2000)
Steady year-on-year growth
Built-in inflation hedges (pricing power, commodity reserves, etc.)
Our portfolios tilt toward these stocks to hedge against the risks while still offering steady growth. If you’d like to discuss this strategy or anything else related to your investments and financial goals, please call us at 800-998-9773.
Data sources: Koyfin, FRED, S&P Dow Jones Indices, Allied Calculations