The Genie’s out of the bottle

Anything whose business model the market fears AI could disrupt had already been under the cosh in the past year and took another knock on Tuesday, when Anthropic’s large language model released a new AI automation tool that could further disrupt certain core businesses. Relx, whose share price has fallen almost 50% from its peak, fell another 10% on Tuesday along with other data service companies. Software has had a terrible start to the year due to AI concerns. The S&P North American software index is on a three-week losing streak, with a 15% drop in January, its biggest monthly decline since October 2008.

What do I know? Part of me is wondering if this is starting to feel overdone. Perhaps in my old trading days, as many of these stocks look deeply oversold, I would be tempted for a dabble, but then one also has to be careful catching falling knives, as the old adage goes. Crisis, as they say, brings opportunity. AI may disrupt traditional industries; some will adapt, and those who do not may eventually die, but it can take longer than you think. There are examples of companies that did not adapt and did die; HMV is a classic example, burying its head at the new world of music streaming. I remember meeting the management at the time, and they were adamant that the world would never cease buying CDs. How wrong they were.

After its big sell-off at the end of last week and the start of this week in commodities, particularly gold and silver, as sentiment got way too bullish. Steven Warsh’s announcement appeared to be the catalyst, but it could have been anything. On Tuesday, it was reverse all engines, maybe helped by a stronger-than-expected ISM Manufacturing report.

One interesting stat from Barclays’ research is that the S&P 500 Index has logged average drawdowns of 5%, 12%, and 16% over one-, three-, and six-month periods after a new Fed chief took the helm. I guess a new Fed chair, perhaps a new level of uncertainty, the new man wanting to make his mark, careful not make errors in the early days. We are also entering a seasonally weak period of the year, and even though we have a way to go in earnings season, the S&P 500 Q4 EPS growth surprises are tracking below the average pace of recent quarters. Feels like it’s all adding up to a period of consolidation, and further volatility between sectors and companies.