Market Talk: Stock's selloff most 'befuddling' of my career

Is the Latest Inflation Data as Good as it Looks? – A Discussion with Nancy Tangler

Key Concepts:

• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Disinflation: A slowdown in the rate of inflation.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.
• Agentic Security: A security approach leveraging AI to autonomously detect, respond to, and remediate threats.
• Vertical Integration: A strategy where a company owns or controls its suppliers, distributors, or retail locations to control its value or supply chain.
• Moat: A company’s ability to maintain competitive advantages over its rivals in order to protect its long-term profits and market share.

I. Inflation Report Analysis & Future Rate Cuts

Nancy Tangler assesses the recent Consumer Price Index (CPI) report as having a positive headline number of 0.2%, but cautions against overlooking underlying trends. While January typically sees price increases across the board, this year’s increase was relatively moderate. A key concern remains the continued rise in services inflation, which is proving more persistent than the decline in goods inflation. Energy and used car prices declining were noted as positive factors for consumers.

Tangler emphasizes that productivity improvements driven by AI are unlikely to significantly impact the services sector, stating, “a facial is a facial and a massage is a massage unless you’ve got an Optimus robot helping you out.” This suggests continued upward pressure on service prices.

Regarding the Federal Reserve’s future actions, Tangler views the recent jobs report as “notoriously fickle” and subject to substantial revisions (historically, revisions of a million jobs per year). However, she highlights a positive trend: new business applications have reached their highest level since before the COVID-19 pandemic, even exceeding those levels, potentially indicating adaptation to the AI-driven environment. Despite this, she anticipates the Fed will likely cut rates at least twice this year, driven by strong economic growth that could reignite inflation, though she personally believes a sustained inflationary resurgence is unlikely. She acknowledges a historical divergence in opinion with the Fed’s policies.

II. Software Sell-Off & AI Disruption

The discussion shifts to the recent sell-off in software stocks due to fears surrounding AI disruption. Tangler specifically addresses ServiceNow (down roughly 30% year-to-date and 27% the previous year), a stock she continues to support despite the market’s negative reaction. She describes the sell-off as “befuddling” and attributes it to algorithmic trading and hedge fund activity.

Tangler contrasts ServiceNow favorably with companies like Adobe and Salesforce, which she exited earlier. She argues that Adobe was slow to adapt to the AI threat, while ServiceNow is positioned as “the conductor of AI on the cloud,” actively pursuing vertical integration in areas like agentic security, creating a “moat” for the company. She acknowledges the market’s disagreement with her assessment, stating, “sometimes you can be right and still be wrong.”

She draws a parallel to the “deepsec” period, noting that a similar pattern occurred with Pterodine, which experienced a 30% decline before a 132% rebound. She believes ServiceNow is a survivor and ultimate winner in the AI race, despite current market pressures.

III. AI Spending & Capital Expenditure (Capex)

Tangler addresses concerns about massive AI spending, arguing that current capital expenditure (capex) is actually in line with historical averages, unlike the spikes seen in the 1990s. She points out that capex spending was consistently high throughout the 1990s. She frames capex as a positive indicator of a company’s confidence in future earnings growth, stating, “when I grew up in the business capex spending was a good thing.” She also notes the reciprocal relationship: one company’s capex is another’s revenue.

This perspective leads her to favor hardware and infrastructure companies benefiting from the capex trend, specifically mentioning Nvidia, AMD (previously held at $26), Cisco, GE Vernova, and Eaton. She highlights recent portfolio additions, including Microsoft, Palantir, Apple, GE Vernova, and Eaton, taken advantage of market weakness.

IV. Notable Quotes

• “a facial is a facial and a massage is a massage unless you’ve got an Optimus robot helping you out.” – Nancy Tangler, emphasizing the limited impact of AI on certain service industries.
• “It is one of the the most befuddling sell-offs that that I've I've seen in my career.” – Nancy Tangler, describing the decline of ServiceNow stock.
• “one man's capex spend is another man's revenue.” – Nancy Tangler, highlighting the interconnectedness of investment and revenue generation.

V. Logical Connections & Synthesis

The conversation flows logically from a broad assessment of the CPI report to a more focused discussion of specific companies and investment strategies. The initial concern about persistent services inflation connects to the broader theme of AI’s limited impact on certain sectors. The analysis of the software sell-off is framed within the context of market overreaction and the long-term potential of companies like ServiceNow. Finally, the discussion of capex spending provides a counterpoint to fears about excessive AI investment, positioning it as a positive sign of economic growth and opportunity.

Main Takeaways:

The latest inflation data presents a mixed picture. While the headline number is encouraging, the continued rise in services inflation remains a concern. The market’s reaction to AI disruption, particularly in the software sector, may be overdone, creating opportunities for long-term investors. Current capex spending is not excessive and should be viewed as a positive indicator of future growth. A nuanced perspective, considering underlying trends and long-term potential, is crucial for navigating the current economic landscape.