To Our Investors and Friends,
The S&P 500 began the third quarter with another meaningful gain, finishing up 2.2% in the month. Artificial intelligence enthusiasm continued to push up utilities and technology, while fears of significant governments cuts to healthcare led that sector lower. The 10-Year Treasury bond advanced modestly by thirteen basis points in the quarter to 4.37%. The 2-Year Treasury note rose 22 bps to end at 3.94%. Oil increased 7.5% in the month to close at $70 a barrel. Popular indexes all moved higher in the month. The Russell 1000 Growth Index led with a 3.8% gain, the Russell 2000 Value Index achieved a 1.8% gain, the Russell 2000 Growth Index moved up 1.7%, and the Russell 1000 Value Index gained 0.6% in the month.
Over the last few months, the market has been led higher by both artificial intelligence beneficiaries and many speculative businesses that have poor business models, and often even lack revenue. Many investors view the current stock market volatility as a replay of the meme stock craze that took place in 2021 that largely ended with significant losses for those companies (some of which have since gone out of business). This appears to be happening again to some extent, driven by social media influencers who spend their time on YouTube, TikTok, Reddit, and Instagram touting their highly biased views.
One example stands out – retail favorite Tesla (TSLA), that reported what can only be described as a dismal quarter for its primary auto and energy businesses that produced revenue declines of 16% and 8% respectively as earnings fell even further. The loss of tax credits will likely materially impact future cash flow to a level that will not easily be recovered. Still, the stock held up when its army of influencers propped it up on the hopes of robots and a self-driving taxi future that may be realized over the next decade. These individuals are happy to say just about anything to keep their Tesla-based livelihood alive, attempting to justify why retail investors should hold on.
As explained in his book, Nexus, A Brief History of Information Networks from the Stone Age to AI, author Yuval Noah Harari explains that “humans gain enormous power by building large networks of information, but the way these networks are built predisposes us to use that power unwisely.” The explosion of misinformation spread by humans on social media is now being significantly magnified by AI chatbots and agents. Unlike new technologies that have created new information systems in the past, Harari explains that “AI not only can compose new scriptures but is fully capable of curating and interpreting them too. Equally alarmingly, we might increasingly find ourselves conducting lengthy online discussions about the Bible, QAnon, witches, abortion, or about climate change with entities that we think are humans but are actually computers.”
Rumors have always been a major factor in daily stock movements on Wall Street. Rumors created by AI for the specific purpose of scaring investors to do their bidding are about to play a major role in the markets. With this in mind, it is more important than ever to separate truth from fiction, and our financial well-being will now depend on it. At Kingsland Investments, we conduct our own primary research. Listening to conference calls, speaking to company management, and building earnings models based on sound assumptions may be the difference between random results driven by an increasing deluge of rumors and speculation, and growing assets over time.
All the best to you,
Arthur K. Weise, CFA