How to Prepare for AI's 'Tower of Terror' Moment
Dear Reader, In 1994, Disney’s Hollywood Studios in Florida opened one of its most ambitious rides yet: The Tower of Terror. True to its name, the giant elevator ride took audiences on a tour through a towering hotel inspired by The Twilight Zone. Mind-bending stories… haunted tales…. eerie music… And once riders reached the 13th floor, the elevator would suddenly stop… then plummet back down the shaft. “Tower of Terror” is a fitting description of markets today. Unlike roller coasters, where you can usually see what’s coming, the Disney Tower ride gives little indication of the sudden drop about to happen. It’s designed to be unusually terrifying. And here’s the most interesting thing: While the elevator ride drops as fast as 39 miles per hour, it doesn’t fall very far. Only six stories are actually used as the shaft’s “fall height,” and special illusions are used to fool people into thinking things are worse than they seem. So, riders never drop as far as it feels, and they never hit the ground. Sound familiar? It certainly feels like we’ve been on our own terrifying ride in the market here lately. Thanks largely to the “tit for tat” game of tariffs playing out between President Trump and other nations on the world stage, investors are growing concerned about inflation, slowing growth... even the dreaded R-word (recession) is coming up in some discussions. As a result, the markets have been in seesaw mode. The S&P 500 set a new record high on February 19. But after that, the overall stock market was in a seemingly downward spiral. Then, last week, the stock market broke a four-week losing streak. Things got off on a positive note this week, as major indices were all broadly higher on Monday and Tuesday, only for things to turn south on Wednesday as a new round of tariff threats emerged. We’ll talk more about the back and forth of the tariff talk – and their ultimate endgame – later this week. Today, I want to focus on how this all feels for investors right now – and the five steps to take to protect your portfolio. A Quick Word of Caution Before we begin, it’s important to acknowledge that selloffs are still negative events (I don’t like it when my stocks go down either, folks). So, even though the following five things to do during selloffs paint a rosy picture, I recognize that pullbacks still have real costs. Warren Buffett might love selloffs because he has billions in the bank to spend; I understand that most Americans have no such luxury. With that said, let’s get to No. 1… 1. Remember that Markets Are Manic The stock market has ignored a lot of great AI news lately. On March 10, for instance, Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) reported that February revenues had surged 43.1% to 260 billion Taiwan dollars. This is a historically strong forward indicator for chip-designing firms like Arm Holdings plc (ARM) and NVIDIA Corporation (NVDA). Separately, the Financial Times noted on March 9 that U.S. startups are raising more cash than at any point since 2021 on red-hot AI demand. These fast-growing firms now have more capital to invest – a positive sign for AI infrastructure firms. And let’s not forget that NVIDIA wrapped its week-long developers conference last week. There was a host of important announcements made, from the company’s next-generation chips to a critical partnership related to self-driving cars, and more. (We’ll have a full rundown in tomorrow’s Market 360.) But investors have only focused on the negatives lately (mainly tariffs). The media only adds fuel to the fire in situations like this, because every setback in talks, and every ensuing pullback, is covered like it’s a full-blown crisis. This has sent the prices of many world-class AI stocks into correction territory. As a result, we’re now facing a grossly oversold stock market where phenomenal companies like NVIDIA are trading at incredible discounts. 2. Keep Your Eyes on the Fed Over the past two months, bond yields have decreased as investors have piled into safe-haven assets. (All else equal, a stampede into bonds raises their prices, depressing their yield.) Lower-than-expected inflation reports recently have also further weighed down on yields. The upshot is that the Federal Open Market Committee (FOMC) has become much more dovish. In their recent meeting on March 19, Fed Chair Jerome Powell said the Fed would scale back its quantitative tightening efforts. Although the Fed only anticipates two rate cuts this year, most analysts now anticipate three rate cuts. Now, as I discussed last Saturday, I expect four cuts. That’s because I expect global interest rates to plummet this year. The fact is economic growth is weak (or contracting) in Asia, much of Europe, as well as Canada and Mexico. As a result, I expect other central banks to continue to slash rates. This, in turn, will cause Treasury yields to decline, and the Fed will not fight market rates. This is a typically bullish signal for stocks because lower interest rates reduce the “discount rate” applied to cash flows and increase present value. Put simply, falling interest rates make stocks more desirable. The effect is even more pronounced for innovative early-stage companies. That’s because their profits are projected far into the future. These positive cash flows must be “discounted” to present value, so even tiny drops in the discount rate can have an enormously bullish effect. (In that sense, pre-profit firms are much like long-duration bonds.) 3. Rebalance Your Portfolio The recent bout of volatility now gives everyone a chance to rebalance portfolios. “Set-and-forget” investors often leave money on the table. They fail to take profits from overly pricey stocks and miss opportunities when lower-priced opportunities arise. In fact, studies have shown that investors can add more than 100 basis points of annual performance simply by regularly rebalancing their portfolios. (Doing so also comes with the benefit of lower volatility.) That’s where my simple 60%/30%/10% rule comes into the picture. In my paid services, I like to divide my portfolio holdings into three distinct risk categories: Conservative, Moderately Aggressive and Aggressive. Everyone’s risk tolerance is different, but I recommend allocating 60% of your portfolio to Conservative stocks, 30% to Moderately Aggressive stocks and 10% to Aggressive stocks. When you do this, you give your portfolio the perfect mix that will protect and grow your wealth while giving exposure to the kind of home run stocks that will jolt your returns. One more thing... Many investors fall into the trap of having too much exposure to one stock. When you have a big winner, it can easily dominate your holdings. While I fully believe in letting your winners run, you have to do it safely. A good rule of thumb is to never let a single company represent more than 10% of your portfolio. 4. Watch the Technical Factors I want to make a comment to folks who are thinking of “buying the dip.” Eric and Luke, as well as myself, all fully believe that recession fears are overstated. America’s labor market remains strong, with unemployment at just 4.1%. Manufacturing output is on the rise; February’s ISM Manufacturing PMI rose to 52.7 up from 50.3 the month before. (Any number above 50 represents an expansion.) And even bond markets are only giving a 27% chance of a recession over the next 12 months – not an unusual figure once you realize a recession generally happens every seven years. However… You should know that stock markets are not rational calculating machines. Again, markets are manic. They’re made up of emotional traders and peppered with stop-loss orders designed to sell indiscriminately when prices fall. Both have a habit of triggering even lower prices, creating even more stop-loss selling, and so on. That’s why it’s helpful to pay attention to technical factors – the price movements that influence human and algorithmic traders alike. Specifically, take a look at the 250-day moving average (250MA) on the S&P 500. Nothing good tends to happen below that, and we temporarily dropped below that level on March 10 when the S&P 500 sank below 5,645. Last week brought a convincing retake of that level. On Monday, the S&P 500 briefly moved above the 250MA threshold, and then surged above 5,675 on Wednesday after the Fed’s dovish comments. This should be seen as a “green light” to dive back into markets. 5. Focus on the Fundamentals This might be the most important one of all, folks. For example, of the 11 AI Revolution Portfolio companies that reported earnings last month, nine beat expectations, and another met forecasts. As a group, these 11 firms posted 18% revenue growth and 24% earnings growth, and they are set to increase profits by another 77% by 2026. In comparison, the S&P 500 grew earnings 7.1% in the first quarter, while revenue increased 4.2%. These are phenomenal numbers and serve as a reminder that great investment themes will outlast any market wobble. A Rare “Second Chance” on the AI Revolution Together, these five actions should make you feel more secure… even when it seems like the whole world is falling down. Let’s face it: Wall Street’s Tower of Terror has unduly pressured AI companies. Traders are rotating into “safe haven” assets like gold, while turning their back on the high upside promise of the market’s best AI plays. The upshot is that when markets bounce back, we believe our fundamentally superior stocks will mount an equally strong rise. As I like to say, fundamentally superior stocks bounce like fresh tennis balls... And that’s exactly what we hold in our AI Revolution Portfolio. So, if you missed out on the big gains from AI stocks since 2023, this is a rare “second chance” to get in on some of the most innovative companies in the world. In fact, our latest batch of picks easily has triple-digit upside in just a handful of months. That’s why I teamed up with Eric and Luke to deliver a rare special broadcast earlier today. In it, we revealed why nearly a trillion dollars of new investments could soon flood two little-known corners of the AI Revolution... how it could accelerate the lucrative AND destructive force behind the phenomenon known as the Technochasm... and what you need to do to prepare (and profit). I urge you to check out our conversation before it’s too late. Click here now to watch our special broadcast now. Sincerely, | .png)
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