On stock markets, a dull week. China is taking a breather after a few weeks of steady progress, doubtless some profit-taking as negotiations on tariffs pick up steam in the background, and down 2-3% depending on the index. Europe was little better, and the US and UK were least bad, down around 0.5%.
Oil had a better week, but remains in a multi-year period of downward drift. Gold drifted again and other precious metals fell in the region of 5%, with copper being the real dog, down 23%, as a raft of speculative trades were caught on the wrong side of the tariff news.
Over the month, our “What’s Hot, What’s Not?” fund level analysis shows the China dominance, with four funds gaining 8%. The UK dominates the “not hot” funds, with seven equity, gilt and property funds.
The hot sectors are a neat spread. As well as China, commodity, technology, US smaller, and Asia Pacific sectors all have average gains in excess of 5%. In the dullards, four UK sectors feature, though mostly down less than 1%.
Other than the spectacular one-day fall in copper, the big financial news was the humiliation of the EU on Trump tariffs. The EU and Japan had the chance to stand up to the bully, but backed off, with little by way of concessions and a fat 15% tariff on their sales to the US. Yet, beyond the scolding headlines, stock markets were little moved one way or another. Political embarrassment was balanced by a welcome new certainty for businesses.
The tariff storm scared markets in early April. After all, history informs us that they are never positive, and in particular it raised the spectre of the tariffs introduced in 1930 (Smoot-Hawley Tariff Act) which played a key role in stoking the Great Depression. Now the financial markets outside the US are mostly quite relaxed. Why?
The tariffs are a tax on US consumers and businesses. There is no VAT in the US, partly for constitutional reasons and partly because it has always been politically unacceptable, which is a shame because it is a very simple way to increase tax revenues when a country is living way beyond its means, and has mountainous debt. But the import tariffs are essentially VAT, a tax on the consumption of US consumers. The inflationary consequences will become clearer as 2025 progresses, and that is why the US Federal Reserve is not rushing to cut interest rates.
As you know, the latest in a series of bubbles fuelling the US stock market is artificial intelligence, AI. The potential for AI to change the world is extraordinary. Sam Altman has predicted that in 2027 AI will start to generate “novel insights”. This means that instead of it merely being a superb search engine, trawling the internet and consolidating the best ideas, it will gather that information and look for gaps, and come up with innovations. Beyond that is superintelligence, coming up with “ideas at a speed and depth beyond human capacity”, and, as Elon Musk modestly puts it, gaining access to every idea he has ever had - on robots, reactors, rockets and space exploration.
The potential has encouraged big tech businesses to spend vast sums, but they can’t all be winners. Google appears to have already bastardised its search engine model, which generated $160 billion in 2024, well over half of its total revenue. When was the last time you did a Google search and scrolled beyond the AI generated answer? Did you notice any adverts? No, nor me.
In the meantime, ChatGPT (or similar) is now the “search engine” of choice for many, and certainly for most in our office. As the Independent headline put it this week, “Google was once the most exciting pace on the internet” – now it has fallen off a cliff, not because it has gone out of fashion, but rather it now has limited use, and the competition is vastly superior. There is considerable uncertainty over the relevance of today’s tech titans in the era of widespread AI adoption in the decade ahead.
In the meantime, the attitude of the herd of tech investors is that everyone is a winner in this brave new world. History says not. Every tech revolution, all the way back to canals, was marked by early hype and bubble prices, followed by substantial disappointment.
For example, Amazon rose by 2,000% in the two years before its peak in 1999, before falling 92%. It wasn’t a bad company – it was just that greedy and manic investors pushed the price to levels which couldn’t be justified. But that didn’t stop the Amazon business coming to dominate online retails sales in the years following.
With that in mind I noted another flurry of warnings from investment banks in the last week. One noted that the CAPE ratio is now nearly 40, more than twice its long term average i.e. the S&P 500 would have to fall by 50% just to get to an average price, let alone allowing for the typical overshoots as investors switch from euphoria to panic.
Sadly we can’t predict the timing of this unfolding, not with useful precision. So we must prepare.