Am I Missing Out on the AI Revolution?

Question: I know I should be investing in bonds right now, but some stocks are doing really well—am I missing out?

Answer: Yes, stocks are higher. Just a few weeks ago, the Wall Street Journal called it a bull market (defined as up 20% from the most recent low), but that’s not a completely accurate description of what’s happening.

Prudent investors need to consider several factors before diving back in on stocks:

• Most of this rally has been carried by a handful of tech stocks, many investing heavily in artificial intelligence (AI) technology. While up is better than down, such a narrow rally is vulnerable to a change in sentiment or circumstances. In this case, circumstances may not even need to change much. The economy is slowing, the inflation rate is falling but remains elevated, and interest rates are at a 20-year high and showing no signs of declining. Add to that tightening credit markets following a spate of regional bank failures, and it’s hard to get overly optimistic about the market. In the short run, this uptick has all the markings of a bear-market rally.
• Bonds remain attractive. One-year Treasury Bills are yielding about 5%, and five-year bills are returning around 4%. That’s not as exciting as AI, but it has been a long time since we’ve had an opportunity for this much return on fixed-income investments.

But what if AI really is a transformative technology, the economy avoids a recession and this is the beginning of a broader market rally?

Remember, one of the keys to successful investing is not making big mistakes, and one of the most common errors is buying into a rally out of fear you’re missing out. If you have an updated, diversified portfolio, you probably are already participating in this rally. And it’s likely your bond holdings are yielding a nice return that won’t fade if the economy goes into recession. In fact, the bonds may even increase in value if interest rates fall in coming months.

That’s the beauty of a diversified portfolio. Some parts of it usually work and support the other parts, even if the economy does something unexpected.

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