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ChatGPT, Can You Pay My Inflated Bills?

June 13, 2023

Read Time 6 MIN

It's entirely possible for both of these realities to coexist: AI could have the same transformative impact as the internet, while inflation continues to persist.

Artificial Intelligence (AI) euphoria is hitting the markets HARD. The market cap of Nvidia alone has grown from $350 billion to nearly $1 trillion this year and helped propel the Russell 1000 Growth Index up over 20% over the same period. Nvidia is not alone. Apple, Microsoft, Tesla, Alphabet, and Meta are, on average, up nearly 50% this year. And we’re not even midway through June yet!

Recession fears are pressuring economically sensitive real assets and creating, in our view, tremendous opportunities to re-allocate your portfolio. Call us old-fashioned, but we believe purchasing profitable businesses at attractive valuations is the hallmark of successful equity investing. This is our opinion; whether we are in a recession, entering a recession, or avoiding a recession altogether does not change that.

This commentary highlights:

The interesting thing about manias is that, for most participants, they make total sense until they don’t. AI will change every aspect of the economy! Digital Assets will save the financial industry! Social media will change the entire human experience! And so on and so on. However, the hype—which often meets expectations in terms of societal impacts—needs to align with reasonable pricing to provide a positive investor experience. The creation of the Internet more than delivered on its potential, but the investor experience varied greatly, depending on the entry point. For example, if you invested in the Nasdaq Index in the year 2000, you had to wait until the end of 2015 to make your money back despite massive technological advancements that completely reshaped the world. Fifteen years is a long time to wait to get your money back!

The chart below demonstrates just how expensive the largest growth stocks are by comparing their average earnings yield to the yield on 2-Year Treasuries. This is a measure of corporate earnings against the cost of capital. Positive (negative) values indicate an earnings yield above (below) what can be earned investing in short-term U.S. treasuries. And negative values indicate a negative earnings yield relative to U.S. Treasuries. The current relationship between large-cap growth earnings yields and Treasury yields, which is deeply negative, is unsustainable, at best. These stocks account for nearly 25% of the S&P 500® Index. Proceed with caution!

Average Earning Yield (MSFT, GOOG, AAPL, AMZN, NVDA)

US Treasury 2 Year Yield 5/12-6/23

Average Earning Yield (MSFT, GOOG, AAPL, AMZN, NVDA) - US Treasury 2 Year Yield 5/12-6/23

Source: Bloomberg as of 6/5/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any of the securities mentioned herein, or as any call to action.

Instead, investors should consider real assets. For example, the chart below compares the average earnings yield of the five largest energy stocks (regarding market capitalization) to the yield on 2-year Treasuries. In contrast to the previous chart, there is a substantial earnings yield premium over short-term U.S. Treasuries.

Average Earning Yield (XOM, CVX, EOG, COP, SLB)

US Treasury 2 Year Yield 5/12-6/23

Average Earning Yield (XOM, CVX, EOG, COP, SLB) - US Treasury 2 Year Yield 5/12-6/23

Source: Bloomberg as of 6/5/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any of the securities mentioned herein, or as any call to action.

Consequently, in our view, as an example of just one real asset, energy stocks offer a rational incentive to invest, while growth stocks do not.

Our assessment of the economy and what we believe it could mean for investors remains unchanged: expect a near-term recession. This view is consistent with the consensus. We recently polled a large number of professional investors, and here are the results:

Do you believe that there will be a U.S. recession in 2023?

Do you believe that there will be a U.S. recession in 2023?

Source: VanEck, VettaFi as of 5/5/2023. Not intended as a prediction or forecast of future events.

Our views of inflation remain steadfast as well: we believe we are in a disinflationary pocket in an extended inflationary regime. Our poll reflects, we believe, the broad abandonment of “transitory” inflation. And in our view, the market is finally beginning to recognize the risks of a protracted inflationary regime.

When do you think high inflation (above 2%) will dissipate?

When do you think high inflation (above 2%) will dissipate?

Source: VanEck, VettaFi as of 5/5/2023. Not intended as a prediction or forecast of future events.

Yet, despite our and investors’ views on growth and inflation, only 18% of those who were surveyed owned enough real assets to diversify against these risks properly.

How large of an allocation do you have to real assets?

How large of an allocation do you have to real assets?

Source: VanEck, VettaFi. As of 5/5/2023. Not intended as a recommendation to buy or sell any of the securities mentioned herein, or as any call to action.

Let us summarize our polls’ results:

  • Question: Do you believe that there will be a recession? Answer: Overwhelmingly Yes (~80%)
  • Question: Do you believe that high inflation will persist? Answer: Overwhelmingly Yes (~70%)
  • Do you own real assets? These assets have historically protected against the combination of a stagnant economy and inflation—“stagflation.” Answer: No (~50% own less than 5%). I’ll buy Nvidia. AI to the moon!

Recessionary concerns have put significant downward pressure on resource assets. It never feels good investing in out-of-favor assets, and fears of a recession have sent investors running from commodities and other real assets. Staying in the herd—by investing in expensive, growth-heavy U.S. stock market indices—comes with, in our view, a false sense of safety. Do not be afraid to step out from the herd when the herd is acting irrationally.

Consider real assets. More specifically, consider RAAX.

VanEck Inflation Allocation ETF (RAAX) is designed as a one-stop solution to address the current investment regime by solving for 3 key questions:

  1. What are the ‘right’ assets to own during high inflation?
  2. How to best allocate these assets?
  3. When to adjust the allocations based on the inflation cycle?

The neutral weightings are based on the long-term strategic asset allocation of the strategy that was designed to balance the risk and rewards of the asset class by maintaining strong diversification across assets with significant upside potential.

Inflation Allocation ETF Exposures

Inflation Allocation ETF Exposures

Source: State Street, VanEck as of 5/31/2023. Not intended as a recommendation to buy or sell any of the securities mentioned herein, or as any call to action.

The fund invests in three types of real assets, which include financial, resource, and income assets. Currently, financial assets, which are composed of gold bullion and gold equities, account for 27% of the fund’s assets. This allocation is expected to hedge against further economic weakness, systemic market shocks, and inflation. The resource assets are currently 42% of the portfolio. These economically sensitive assets, in our view, offer significant upside due to the supply-demand imbalances across commodities and attractive earnings of natural resource equities. And lastly, income assets account for 30% of the portfolio. Income-generating real assets offer attractive portfolio yields and the potential for price appreciation to hedge against inflation and add further diversification benefits to the portfolio.

Thank you for reading our latest commentary. Our goal with each of these commentaries is to provide you with our assessment of market conditions and actionable investment ideas to navigate the current environment.

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Important Disclosures

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Consumer Price Index (CPI) is an index of the variation in prices paid by typical consumers for retail goods and other items.

The S&P 500® Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.

The Russell 1000 Growth Index measures the performance of the large- cap growth segment of the US equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Nasdaq 100 Index is comprised of 100 of the largest and most innovative non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit https://www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

VanEck Inflation Allocation ETF (RAAX): An investment in the Fund may be subject to risks which include, among others, risks related to investing in real assets ETPs, which may subject the Fund to commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, ETP-related equity securities, small- and medium-capitalization companies, foreign securities, emerging market issuers, ETP-related foreign currency, credit, interest rate, call, concentration and derivative risks, all of which may adversely affect the Fund. The Fund may also be subject to fund of funds, affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), cryptocurrency, cryptocurrency tax, liquidity (with respect to commodities instruments), gap, cash transactions, high portfolio turnover, models and data, active management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, and non-diversified risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small- and medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

Important Disclosures

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Consumer Price Index (CPI) is an index of the variation in prices paid by typical consumers for retail goods and other items.

The S&P 500® Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.

The Russell 1000 Growth Index measures the performance of the large- cap growth segment of the US equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Nasdaq 100 Index is comprised of 100 of the largest and most innovative non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit https://www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

VanEck Inflation Allocation ETF (RAAX): An investment in the Fund may be subject to risks which include, among others, risks related to investing in real assets ETPs, which may subject the Fund to commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, ETP-related equity securities, small- and medium-capitalization companies, foreign securities, emerging market issuers, ETP-related foreign currency, credit, interest rate, call, concentration and derivative risks, all of which may adversely affect the Fund. The Fund may also be subject to fund of funds, affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), cryptocurrency, cryptocurrency tax, liquidity (with respect to commodities instruments), gap, cash transactions, high portfolio turnover, models and data, active management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, and non-diversified risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small- and medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.