The Morning After

Wall Street took just 24 hours to change its mind. On Wednesday, the S&P 500 gained 1.6% as investors welcomed the Democrats' election victory. On Thursday, the Nasdaq plunged 5.5%, suddenly fearing that the same result could derail the bull market. Friday brought a modest rebound. Same election. Different mood.

The reason? The AI bubble was about to burst. Except that, in many corners, it already has. AI isn't one trade: chipmakers, hyperscalers, data-centre builders and software providers have very different risks and economics. Micron is trading nearly 50% below its peak now, CoreWeave almost 70%, and even Nvidia is down around 25%. Thursday was hardly the beginning of the reckoning.

Where did the money go? At first into value and defensives, even though consumer staples were already trading on higher forward earnings multiples than technology. Then investors rediscovered the much-maligned bonds, the dollar and even gold. More volatility looks inevitable. The new Congress won't convene until January, hopes for peace in Iran may prove premature, and fresh inflation data could always spoil the mood.

But volatility needn't be bad news for long-term investors. Worried a month ago about too much duration in your bonds? Long-dated Treasury yields have since fallen nearly half a percentage point, offering a great opportunity to trim that exposure. And if that isn't enough, there is always the Santa rally. The S&P 500 has risen in 77% of Decembers since 1950. Markets rarely offer the right price when we want it. When they do, go shopping.