Shilling: ‘Fads’ Fueling Market, Even as Growth Slows
The economist recommends that investors “avoid vastly overpriced speculative stocks,” like the Magnificent Seven, and crypto.
U.S. stocks are being supported by speculation, as equities linked to artificial intelligence and other “fads,” including Nvidia, support the market amid sliding economic growth, according to A. Gary Shilling.
Among Shilling’s five investment themes, the investment advisor and economist continues to recommend investors “avoid vastly overpriced speculative stocks such as the Magnificent Seven, AI, SPACs, Nvidia and crypto securities.”
Nvidia and the other high-powered Magnificent Seven growth stocks have risen 20.2% this year, Shilling noted. The S&P 500 is up more than 9% year to date, but only 7% without these seven stocks, he said.
“With the Nvidia craze, investors are saying that the rest of stocks and the economy are trash. But recall the rise and fall of EVs, green energy, ESG and social investing and other recent fads,” Shilling said in his June “Insight” newsletter, released Friday.
Fads in financial markets “are still rampant,” Shilling said.
“Some will continue to disappear without a trace, except for huge losses by gullible, overenthusiastic investors. Others will probably survive after excruciating industry consolidation and losses,” Shilling wrote.
“It’s clear that the bloom is off the rose for electric vehicles, green energy, ESG investments, social investing, stay-at-home spending and the Everything Rally. Only AI and the Magnificent Seven are still standing.”
Nvidia’s CEO has declared that his company’s chips, powering AI’s rise, threaten to disrupt virtually every major industry, he noted.
“Some Wall Street analysts believe Nvidia is the leading supplier of a boom that could rival the introduction of personal computers, mobile phones and the Internet — or be even bigger! Rivals such as Advanced Micro [Devices], Amazon, Google, Microsoft and Meta threaten Nvidia’s lead,” Shilling added.
While suggesting with some sarcasm that Shakespeare is “finished” due to AI’s ability to mimic human text, the economist said, “we note the zeal for Nvidia only partly in jest because it is so reminiscent of other fads of recent years.”
Shilling also said inflation is not hot enough to force the Federal Reserve to tighten credit but not low enough to spur the central bank to ease interest rates. The Fed’s 2% inflation target should keep interest rates up this year, he said.
“Excess savings from pandemic stimuli is exhausted and U.S. consumers are increasingly financially-stressed. High house prices have killed a sector that’s usually an economic spur. The leading indicators index, the inverted yield curve and other reliable indicators point to a recession,” he wrote.
Shilling also continues to suggest that investors:
- Long the U.S. dollar against other major currencies as the world’s premier safe-haven.
- Long Treasury bonds, which have rallied since mid-February and should rise when the Fed eases credit.
- Switch Asian investments from China to India.
- Hold extra cash to prepare for later economic and financial market strength.
