Lessons from the AI Pullback

Interviewer:
Well, joining us now with more on markets is Raymond James, Senior Portfolio Manager, Kim Inglis. First Kim, lots of investors are wondering whether a pullback in the Magnificent Seven will cause a meltdown in the broader market. Is this a concern you think? 

Kim Inglis:
Yes, so I think it's important to look at how the market's been reacting to things. And one day in particular that I want to point to is a day where the markets were quite volatile recently over some news that came out from a small startup AI company called DeepSeek. And it caused quite a bit of market volatility. Of course, had people worry. Is this a turning point for the markets? Are they going to crash or what have you? And I think that if you actually drill down and you look at how the markets reacted that day, it's actually a pretty good indication of the resiliency of the markets. So if you look at, as an example, the S&P 500 that day, it was obviously down. It was down quite a bit, which is not surprising because the Magnificent Seven make up such a big component of that. But if you instead look at the constituents of the index-- so if you look at the 500 companies in there and you look at them on an equal weight basis, and so you essentially take out that tech bias that's in there right now, it was actually up on the day. So when you think about that, it's a good reminder that just because there's pain in one sector, it doesn't necessarily translate into pain for all the rest of the market. And so I think that it's important for people to consider the fact that the index is market-cap-weighted index and think of things more as how are the rest of the companies in their doing.

Interviewer:
Is there a lesson to be had from the recent AI pullback? 

Kim Inglis:
Yeah, I would say that definitely a lesson to be learned there would be that diversification is your friend. It's a good reminder of the importance of it. All too often when the markets are doing really well, investors can have a tendency to be a bit more complacent with things. They'll let their positions ride. They won't do any rebalancing. And what happens with that is that you end up with a lot of overweight positions. And more recently, a lot of investors really piling into the magnificent seven stocks is that they're also really overweight in a sector. And the problem with all of that is that often that translates into portfolios being a lot more risky than an investor might have originally intended. And so when volatility comes around, which invariably it does, it makes the portfolio swing a lot more, which of course, from a behavioral finance standpoint, it can make portfolios a lot less comfortable for investors and can make them more apt to make bad decisions. So diversification would be the best reminder there. It helps you stay disciplined. 

Interviewer:
You'll speaking of swings, should investors expect more volatility this year? 

Kim Inglis:
Yeah, unfortunately, I would say that it's likely we will see a fair bit of volatility this year, or at least more than we've become a little bit accustomed to lately. The primary source of that, I would say, would be the news coming out of Washington. From a headline perspective, it'll cause a lot of knee jerk reactions to things. And of course, there's a fair bit of uncertainty there as to how the different policies and tariffs and such will play out. So markets don't like uncertainty. Of course, that will cause some volatility. I would also think that inflation might be a cause for some volatility. So although it's come down to the 2% to 3% range for both Canada and the US, it could become a bit sticky, depending on how things play out with on the political front. 

Interviewer:
Does that mean investors should expect a negative year? Or no, not necessarily since volatility can swing in either direction? 

Kim Inglis:
Yeah, well, exactly. So I think that it's important for investors to remember that volatility, just because there's volatility, it doesn't mean that markets will end up down. Volatility happens every year. It is a very natural, normal part of the markets. And if we didn't have market volatility, there would mean no market, really. I think that if you're looking at the different markets, if you're looking at the US as an example, I actually think that it's poised to do well. It's doing well from fundamental perspective. The economy is really strong. We're seeing strong earnings growth. We're seeing corporations doing a lot of good things. They're doing shareholder friendly activities, like raising dividends and share buybacks. And of course, those corporations are actually poised to do well with tax cuts and deregulation coming down the pipes. Of course, being in Canada, the Canadian markets, there is a bit of that overhang with regards to tariffs and how that will play out. It's a bit too early to tell there. But a good thing with Canada is that Canada, the Bank of Canada is still decreasing, lowering interest rates, which is a good thing. Typically, when you see rates coming down, it's a good thing for both stock and bond markets. 

Interviewer:
Well, finally, Kim, in light of everything that we've been talking about today, how should investors be positioning themselves in 2025? 

Kim Inglis:
So I think, from at least a financial market standpoint, the US is poised to do well. So I would encourage investors to consider having a more of a US market tilt to things. If you're an investor that looks at individual stocks, I would look at high quality dividend paying stocks because if we do see some more volatility, those are the names that should do well. From a sector standpoint, I would expect that financials could be a beneficiary of some of the deregulation coming down the pipes. And if you're an ETF investor, I would, going back to that concept of the equal weight, there I would look at an equal weight US ETF. If we see more volatility, say in the tech sector, it'll give you a bit more protection from that, but also give you the exposure to the US markets, which again, as I said, I would expect to do well. 

Interviewer:
Well, Kim, always great to have you. Thanks again for joining us. 

Kim Inglis:
Thanks for having me. 

Interviewer:
And thank you for watching. Once again, that was Kim Inglis with Raymond James. And I'm Jenna Dagenhart with Asset TV. (upbeat music) (upbeat music) (buzzing) This is all for tonight.