Political dysfunction in Washington and the ongoing US government shutdown will be major forces unsettling markets this week, says F/M Investment’s Alex Morris.
Speaking to Trader TV, the CEO discusses what’s driving market sentiment, how equities could be underestimating global risks and unpacks his views on how to build a resilient portfolio. Morris shares his take on the AI boom, concentration risks in mega-cap stocks, and the likelihood of a broader market correction. Also, in This Week, he discusses how he would be advising traders to approach the upcoming week and other market events to pay close attention to.
Interview
Josephine Gallagher – There is a lot of market noise right now, from the ongoing US government shutdown to sticky inflation numbers and then this huge investment in mega-cap tech firms and AI. In your opinion, what is driving market sentiment right now and what’s informing your investment decisions?
Alex Morris – The greatest driver in markets today, and for us, very much the government shutdown, but really the underlying disarray in government function in the US. First it was tariffs, and then it was cabinet choices, and now it’s monkeying around with the BLS (Bureau of Labor Statistics). We’ve had its head fired. We couldn’t get non-farm payrolls out. We had to stumble with CPI (Consumer Price Index). We’ve had to recall staff so we might actually produce CPI, which is critical for index salaries, for military pay, for social security, for a handful of other important government measures, both in the US and abroad. All that comes together for investors to say, well, that doesn’t seem like things are great, yet equity markets power forward, as if to say, we know something the rest of you don’t. As we look at how do we position portfolios? What are we looking for? For the major catalyst? Obviously, it’s easier to become more and more bearish, as you see all these statistics start to point in different directions, but practically speaking, we don’t think it’s time to become a perma-bear just yet. Some of the global catalysts that folks should be worried about seem to be resolving or at a stalemate, at least coming into the winter in Ukraine, maybe we get some action the Middle East that’s positive. Still a lot that could go wrong there. Equity markets have chugged along. The yield curve has come down some. There’s been some steepening and renormalization, and then all this comes together in someone’s name who hasn’t really hit the front pages in a while, Jay Powell. He brought a Fed to the party who was fairly concentrated in their view, with the exception of one dot, in the short run. In the long run, though very dispersed in what they think might happen. And all of that should tell equity investors and bond investors as well, maybe this isn’t a straight lineup, but that message is yet to get through, and we think, for the time being, that that trend will continue.
Josephine Gallagher – There are growing concerns of over-concentration and AI stocks and the possibility of this broader market correction. How are you evaluating these risks?
Alex Morris – So it’s a reality of eventually a broader market correction. Will the over concentration of AI be the reason for it? Unknown. But right now, that concentration is somewhat necessary because some of the companies or beneficiaries of this have made so much money that the best investment they can make is in each other, and they’re actually quite good together at solving some of these foundational issues that need to be done. Water, power generation, building, data centers. There’s all these sort of fundamental issues that concentration will do well to solve. The downside is that doesn’t mean it helps anyone else yet, and how do we get to that? Because right now, all of that investment is on a hope and a dream, there is a business model eventually. We see some green shoots of that, certainly. And more and more people are turning to ChatGPT or to Claude to solve workplace problems, personal integration, and system technology issues in their personal lives. That’s actually working, and the message is getting out there. And I guess the good news is the apparent business model is net productivity gains, which we’ll need to keep powering the economy forward when we have a smaller workforce, and particularly as immigration issues in the US take hold. Along the way, there’ll be a few stumbles, and ultimately, valuations, from a CAPEs (Cyclically adjusted price to earnings ratio) aspect, they could continue to go up forever. We don’t think they will, but we don’t think that’s going to stop just yet.
Josephine Gallagher – And so how do you build a portfolio that is resilient to chaotic news cycles?
Alex Morris – It’s a sort of unfulfilling answer that I’ll give, but we think it’s the right one, which is diversification. Whether it’s 60/40, or 70/30, having a broader diversification in your portfolio, having global diversification versus just home country, bias tends to pay out in the long run. Some of this also is just benchmarking biases, because we will ultimately say, how did we do compared to a handful of globally diversified, broad indicators? But practically, as times get more uncertain, you want to spread your bets out further, because you’re less likely to know what is going to work. And we’ve been a big proponent of staying broadly diversified. Using some of that portfolio when themes are running, to concentrate there, but being willing to take profits early, because by the time everyone has realized that there’s a rush for the exits, you often get crushed in the stampede, and here diversification is your buffer against that. Added liquidity is a key factor as well. We always get worried, and we see concentration in trades that are only generating value through illiquidity, and certainly the rise of private equity, private credit markets that tend to be illiquid we see first brands, proving that maybe there isn’t as much sunlight shining through into these deals as investors had thought, and that the private credit community isn’t going to come to the rescue of every company that’s there and renegotiate covenants. Those are all good reminders that the best answers sometimes are the simplest, a broad diversification, higher levels of liquidity. Take your concentrated shots into things that are running, but knowing that you will have to find the exits at some point, and you should be willing to do that before it hits the peak, because once it’s over, it’s really hard to decide when to catch the falling knife on that.
Josephine Gallagher – How would you advise trading desks this upcoming week, and what should they be paying close attention to?
Alex Morris – Traders really need to focus on the dollar. Certainly, what happens in Washington, DC? Can the government find a way to put itself back in business? Global macro events, we’re going to hear a lot about Middle East politics, which don’t really drive markets as much as I think the headlines would lead you to believe, but you will see currency fluctuations as a result of it. You’re going to see gold continue to move around the 4000 mark. We think it’s still a good time to own gold. We’ve owned Gold Forever, and still think you should. We’re not gold bugs inherently, but think there’s a lot going on in the middle. And we also think, you know, it’s probably a good time if you’ve been overly concentrated in Mag 7 names to start looking to some international names. The Yen has been an interesting trade. You know, we don’t think there’ll be BoJ (Bank of Japn)j intervention till, say, 155 Yen, which is pretty much market consensus. Beware the Widowmaker trade there but probably a lot of action to be had in studying and being ready to move in Japan given new prime minister, new government strategy, and what has really been a much more volatile BoJ and much more volatile Japanese political structure than we’ve seen in recent times.
Catch Trader TV shows each week:
To watch Trader TV This Week shows go to – Video
Or make sure to follow us on LinkedIn – Trader TV’s LinkedIn
Available as a podcast – Link
