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Hello, Reader.
On a frozen lake, the ice can be two feet thick in one spot… and barely an inch thick a few yards away. That’s why experts warn that you should never judge a lake by its surface.
From the shoreline, it may look like one solid sheet, but “white ice” – the cloudy layer that forms when snow melts and refreezes – is only about half as strong as clear ice, even though it can look every bit as sturdy.
Veteran fishermen have another rule worth mentioning here. Good ice tends to creak and groan before it gives way. “Rotten” ice breaks without warning.
Today’s stock market looks a lot like that frozen lake.
And Wednesday’s post-election rally makes the comparison even more important. The market appeared to be celebrating the election results, with investors betting on a divided government. But a rising market doesn’t necessarily mean the underlying ice has gotten any thicker.
From a distance, everything appears solid. The major indices are hovering near record highs. But step off the shore, and you’ll find the ice is thick in only a few places… and dangerously thin almost everywhere else.
So, in today’s Smart Money, I’ll explain why I believe investors are currently standing on thin ice. Then, I’ll share five tactics that can help you keep your footing.
Let’s get into it…
A Very Bizarre Situation
The market right now is an extremely narrow one.
An unusually large number of stocks are hitting new lows – and very few are reaching new highs. Both readings are approaching historical extremes.
While this isn’t necessarily a dangerous situation, it’s not typically healthy to have that kind of divergence between lows and highs.
A big reason for this divergence is oil. Prices have spent months well above $80 a barrel and recently topped $100. Rising energy prices flow through entire supply chains and also affect interest rates by pushing them higher. That’s bad for most companies.
Larger companies, such as Nvidia Corp. (NVDA), Meta Platforms Inc. (META), and Amazon.com Inc. (AMZN), are strong enough to withstand that headwind. But mid- and small-cap stocks, which tend to have more debt, have been declining since August.
The averages are managing to hang on because the big companies are holding up. But the longer this imbalance persists, the worse it becomes. At some point, even the big companies can’t withstand the pressure.
Meanwhile, the AI trade that’s carrying those big companies has developed some cracks of its own.
AI spending is proceeding at a ferocious pace – close to a trillion dollars per year in new investment in AI data centers and associated infrastructure. At the same time, the price of compute is falling pretty precipitously. That’s not a good combination. You want to see the prospects for return on investment improve, not deteriorate. That’s made the market jittery, reactive, and volatile.
And now that the midterm results are in, the market responded with a rally. But I wouldn’t mistake that reaction for an all-clear signal.
Politics may influence the headlines, but the bigger forces driving stocks remain the AI trade, interest rates, and geopolitics – particularly the war in Iran and its impact on oil prices. Those are the forces I expect to have a much greater influence on stock prices in the months ahead.
In other words, the ice is groaning. That’s not a reason to panic. But it is a reason to watch every step.
Don’t Stay on Shore – Stay Self-Determined
Now, a tricky market is not an impossible one. Thin ice doesn’t mean you have to stay off the lake entirely. It means you need to move deliberately, test the ground in front of you, and refuse to follow the crowd onto the weakest patches.
I call this approach “self-determination.” A self-determined investor honestly evaluates both risk and reward, and then sets a long-term course toward wealth creation. In practical terms, it comes down to five tactics…
1. Own Businesses, Not “Tickers.” In a market this narrow, you can’t just throw a dart at a sector and expect it to work. Self-determined investors insist on buying businesses with formidable competitive moats – special situations that have the potential to do well regardless of what the overall market does.
2. Respect Both Promise and Peril. AI is transformative, but it also has a split personality. The bulls will say that falling compute prices will simply unleash more demand. That could well happen, but it’s likely not going to be a smooth road to that point. The intelligent course is neither blind enthusiasm nor blanket rejection.
3. Think in Years, Not Days. Consider Brazil. When Luiz Inácio Lula da Silva unexpectedly won the presidential runoff, Brazilian stocks sold off about 20%. But Lula is a known quantity. During his first two terms, the Brazilian stock market rose 1,200% in U.S. dollar terms. Brazilian stocks are dirt cheap, so I generally believe this is a buying opportunity. The same patience applies to energy stocks – they are usually one-, two- or three-year holdings – not short-term hedges.
4. Diversify Without Diluting. Diversifying your portfolio the right way means balancing high-growth innovators with stalwarts in sectors like energy, infrastructure, and healthcare. Over the last four months, indices of pharmaceutical and medical technology stocks are up about 20% to 30%. Over the same period, the Magnificent Seven stocks, on average, are up only a little.
5. Refuse the Seduction of Fads. The AI mega-caps are grabbing all the headlines. I don’t expect those big names to be disasters, but I do expect them to do very little, given how high expectations already are. Every AI stock should be dissected. There is opportunity across all four AI categories I’ve identified – Builders, Enablers, Appliers, and Survivors. Spread your investments around all four rather than piling into the same handful of crowded names.
Where to Find Solid Ground
The investors who make it safely and successfully across a frozen lake aren’t the fearless ones. They’re the prepared ones – the ones who know where the ice is thick.
That’s exactly the approach I take in my flagship research service, Fry’s Investment Report.
Rather than chasing the day’s hottest AI headline, I look for the big-picture trends that drive huge, multiyear moves in entire sectors of the market. Our portfolio is built to play the AI trade intelligently while also positioning my subscribers for long-term opportunities in healthcare and energy, where we’ve held large allocations for the past two years.
In a market where the ice is so thin, knowing where to step matters more than ever.
Click here to learn more about Fry’s Investment Report.
Regards,
Eric Fry
P.S. Since World War II, the S&P 500 has risen from November through June after all 21 midterm elections. Will this time be different? In the newest episode of the InvestorPlace podcast, I join Louis Navellier, Luke Lango, and Jonathan Rose to debate a post-midterm rally, AI spending, and the Anthropic IPO. Watch it here.
