Market Comment - March

In the financial industry, the end of the quarter is an important event. For large U.S. funds managing more than $100 million, it is not necessary to provide public holding reports on a monthly basis, but on a quarterly basis. Whalewisdom, a website that provides data and enables clients to screen fund allocations, is currently tracking 4269 funds. The data clearly provides the fact that most are overweight technology, especially the Mag7 companies. The end of quarter trade has shown that large funds desperately wanted to reduce exposure in the technology sector. As a result, we have seen a minor capitulation event on the 30th of March. The global X Artificial Intelligence ETF AIQ lost 7.14% during the past four weeks. Since the end of January, it has been relentlessly underperforming the S&P500. Only a couple of months ago, the financial media celebrated the AI revolution as the engine of the U.S. economy, which translated into a stellar demand for all kinds of AI-related investments. As previously mentioned, in our view, AI is not a technical revolution but merely a synergy of past inventions. No doubt, fund managers that are overweight underperforming assets will have some explanation to do in their quarterly reports. It will not come as a surprise if they claim that valuations are attractive at current levels, and they are not worried about the technology sector at all. Certainly, there will be a tug of war among analysts, whether the technology sector remains a good place for investors or not. The underperformance of the AI sector, though, is reason enough to remain cautious. The Middle East conflict will by all means remain the center of attention in the coming weeks. The US president is maneuvering himself into a difficult position and he will soon realize what damage he has created. Most people believe that the highs in energy prices are behind us and a peace accord will mark the top. The problem is, we are not in an energy shortage today. But we are going to be in a shortage by the latest end of April. The issue will be that we run out of inventories. The tariffs were easy to remove. The longer the conflict lasts, the longer it will take to get the oil market back in shape. In its latest report, Carlyle wrote that every major geopolitical inflection point of the past fifty years has triggered a rotation from asset-light to asset-heavy. Energy has compressed to 3% of the S&P, while technology has expanded to 53%. In the 1970s, energy at 25% provided a natural portfolio hedge. At 3%, that hedge has vanished. The market priced energy as a declining asset and technology as a perpetual compounder. The month of April has started with a cease-fire, and unsurprisingly, investors start to dig into the technology sector once again. Because it has worked for over a decade, what can go wrong. The CRB Commodity Index, thanks to crude oil, is currently trading at very overbought levels and needs a rest. But our data shows that it has much more potential. It could be that 2026 is the new 1966. Let’s hope that the Iran war does not become the new Vietnam War. The secular bull market in equities that has started in 1950 ended in 1968. At that time, the market was dominated by a few stocks, like we are witnessing today. It was also the beginning of an inflationary period that lasted until 1982. More than 10 years of inflation, seasoned with periods of stagflation, will need a completely different portfolio than what the crowd at Whalewisdom is “hodling” today. Of course, such big portfolios cannot change allocation at once. But over time, it could well be that the financial industry will have to adapt to a new world. The current geopolitical situation is difficult to predict. China wanted to create a triangle of power on the world map, meaning coupling it with Russia and Iran. Thinking out of the box, Iran could just buy a nuclear weapon, either from China, Russia, or even North Korea. The oil tanker that floats to China certainly does not return empty to Iran. Finally, the seasonality pattern for mid-term election years is pointing towards more correction potential from May until September. The strong rebound, though, leaves us with mixed feelings. Usually, strong rebounds have a 3-stage pattern. First, shorts get closed. If the market holds up, institutional investors need to buy, maybe because they have sold too much at the end of March. Then the crowd follows. With absence of terrible news, the market should try to move up a little bit further, or at least keep the recent gains for a while, as there is a bid.