Fly or Buy?

We are watching an interesting juxtaposition in markets: Recent pullbacks in high-flying semiconductor and big tech stocks have dented investor confidence, yet we are on the precipice of the largest IPO in history. The hype around AI and innovation is palpable.

Investors are asking themselves: Is this a pullback in the midst of a bull market, or the beginning of a bear market? I believe we are still in a bull market, and here's why.

By early June, the ICE Semiconductor Index had risen over 100% from its March 30 low. It then pulled back by 16% in a matter of days amid chatter about bubbles bursting. After such a meteoric rise, a 16% retracement is a drop in the bucket, even if it's difficult to see that when it's happening.

Over those same periods, the Nasdaq 100 (an index tracking the 100 largest stocks in the tech-heavy Nasdaq composite index) rose 35%, then fell 8%. Broaden the lens out to the S&P 500 index and the gain was 21% followed by a drop of only 5%.

A 5% pullback in the S&P doesn't even qualify as a correction (-10% or more), let alone a bear market (-20% or more). All bull markets include short pullbacks, and this one is no exception.

Of course, the speed of moves like this can leave investors feeling like they'll be late to react no matter what, and that is likely true if you're trying to time the market. But remember: Average returns during bull markets far outweigh average drawdowns in bear markets.

And for all the comparisons we make to the late 90s, it's worth noting that the current bull market run is only a fraction of what happened back then.

That's not to say we shouldn't manage risk. In fact, this period of market concentration is exactly the time when risk management is most important. But maintaining exposure and skin in the game is equally important during bull markets. At some point, this bull market will come to an end, but I still see too much enthusiasm and expectation for major shifts in productivity and innovation for this to be the end.

Rotation Back On

Alongside the bubble bursting fears came an increase in chatter about rotations, which poses another question for investors: Is this pullback a risk-off move, or simply a rotation into other parts of the market?

As of now, it's a rotation, IMO.

Taking a look at the best and worst industry groups over this short period of a drawdown shows that the pain was almost exclusively felt in technology groups that had seen the strongest returns immediately beforehand. Conversely, the top performing industry groups include Pharma & Biotech and Banks, which are either growth-oriented or cyclical — decidedly not risk-off.

Additionally, if this were a risk-off move, I'd expect to see some money rotate into safe haven assets such as U.S. Treasuries, but that didn't happen. Treasury yields actually rose over the past week (meaning investors sold Treasuries).

The downturn may be uncomfortable, especially if your portfolio is concentrated in AI-centric stocks that are feeling more dramatic swings, but I don't see convincing evidence that this is anything but a market reallocating money into spots that aren't as extended on price.

What Would Change My Mind?

It would take something more fundamental to change my mind. For example, downward adjustments in CapEx spending by the hyperscalers, downward revisions in revenue expectations by semiconductor companies, or a Fed rate hike that feels premature. There are a number of other possibilities, but those would be the big ones.

As far as I see it, the fundamental picture has not deteriorated. Investors are still hungry for growth opportunities, and companies are still willing to spend to create it. Rotations can be healthy, but they are rarely smooth.

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