Daily Commentary

MarketMinder’s View: As always, we are politically agnostic, so our look here at headwinds facing the Biden administration’s signature industrial policy focuses on the economic and market aspects, not the politics and personalities. When the Inflation Reduction Act passed in 2022 with a raft of subsidies for solar and other so-called “clean energy” companies, cheer over the industry’s prospects abounded. “Green” stocks had rallied bigtime in the run-up to it, and to many, it seemed like the law ratified those high hopes and ensured a bright future. But since then, the industry has learned one of the eternal realities the hard way: Government-directed industrial strategy is a case of the government trying to pick winners and losers, but it doesn’t guarantee those hand-picked winners actually win. Sometimes they run up against competition from another country’s industrial strategy, which seems like the case now with solar. It is hard to manufacture a subsidized boom when another country got a head start on the same and flooded the market. In our view, this is the latest example of the disappointment markets saw coming as green stocks took it on the chin the past couple years. Now the industry is counting on tariffs to level the playing field, but we have our doubts. For one, renewable energy has long faced cost challenges—tariffs will only keep those prices high, impacting installation and generation costs and making other sources (natural gas, coal, etc.) more viable. This highlights how addressing a distorted market by adding more distortions tends not to bear much fruit in the long run and can inflict collateral damage elsewhere. So we see this as a situation to watch, though it is probably in too small a corner of the economy to present a risk to the broader expansion.

MarketMinder’s View: Flat retail sales volumes aren’t great news, but saying “consumers cut back” on spending seems like odd framing. If retail sales rose in February and held steady in March, that doesn’t seem like cutting back. Rather, based on the underlying details, higher prices hit sales at food shops and department stores while sales rose at clothing, furniture and hardware stores as well as gas stations. The ups and downs canceled one another out, leaving the inflation-adjusted total flat. But sales still rose in Q1 overall, and nothing seems out of sync with the other signs of green shoots after two straight GDP drops. Besides, most consumer spending goes to services, which the retail sales report doesn’t capture.

MarketMinder’s View: Before we begin, this piece mentions a handful of companies, so a friendly reminder that MarketMinder doesn’t make individual security recommendations. Their mention is coincident to highlighting a broader theme. Namely, the hype around Artificial Intelligence (AI) has cooled in recent months as the technology faces sizable roadblocks, including government regulation and mounting questions about the existing technology’s capabilities. Thus, AI chatter has changed tune. “Drastic warnings about AI posing an existential threat to humanity or taking everyone’s jobs have mostly disappeared, replaced by technical conversations about how to cajole chatbots into helping summarize insurance policies or handle customer service calls … While money keeps pouring into AI, very few companies are turning a profit on the tech, which remains hugely expensive to build and run.” This is all largely consistent with what we wrote when ChatGPT went mainstream over a year ago. At that time, headlines heralded how AI would massively disrupt economies and humans’ way of life (though similar technology has existed for decades), touting the possibility of huge investment returns. That may be so in the very long term, but the large language models and other forms of generative AI getting all the attention don’t fit the bill. Rather, they were the fruit of years of research and investment, the culmination of a period in which many pureplay AI firms had already gone through a full Silicon Valley hype cycle and failed. That left the large growth-oriented Tech firms with diverse enough revenue streams to subsidize big server costs—as well as those making the chips these powerful machines run on—as the likeliest winners, which has largely borne out. Now, most see AI as a way to help big companies cut costs and become more efficient—far from the paradigm-shifting tech we saw touted not long ago. We think this provides a valuable lesson for investors: Before chasing heat and diving into a widely hyped investment, ask yourself a few questions. How far out into the future are the potential returns, and how can you form a rational estimate of the probability this one company out of scores of others will be among the winners? Is it possible the hype and expected returns are overstated? Most importantly, does the tradeoff between risk and potential return fit into my long-term investment goals and needs? This mindset can help you avoid getting dragged into the temptations of a hype cycle.