Artificial Intelligence and Stocks

Yin Luo, head of quantitative research, economics and portfolio strategy at Wolfe Research, is a longtime champion of artificial intelligence (AI) and its potential to transform investing, according to a recent interview with Barron’s.

While Luo but doesn’t think that robots will replace money managers soon, he does believe that machine learning can give investors an edge. Here are some highlights of the interview:

  • Machines investing on their own, says Luo, is a outlandish concept. “This stage still requires very heavy human interaction,” he says, “with humans designing models and the machines learning, rather than machines doing the investing.”
  • AI, says Luo, is more about “giving fund managers better insight, so it’s complementary rather than a replacement for them.”
  • On the difference between traditional quantitative research and AI, Luo explains that in typical financial analysis, you “form a hypothesis before you do the testing, like believing that valuation or price momentum drives stock returns. Then you collect data and back-test.” But in AI, there is no human hypothesis. Instead, you identify what you think is a relationship between factors, and as the market evolves, the machines “should be able to identify new patterns and relationships.”
  • After the last earnings seasons, says Luo, sentiment is still “fairly positive, though inflation and interest rates are an economic risk. The biggest concern is political, with trade and regulatory risk.”
  • The bull market is “losing steam,” says Luo, but is not heading into a bear market yet. He says, “We are at the peak point in the economic cycle, growth is showing some signs of weakening, and inflation continues to rise.” He says that a slowdown, rather than a recession, is in the offing.
  • Another risk, notes Luo, is a trade war. “We have an algorithm that goes through every major media and social-media site, looking for key words related to trade conflict…Once people are talking about it, it is more relevant to stock performance. Today [that chatter] is at its highest point since we started tracking these things in 2003.”
  • Luo says that, in the near term, his firm’s models favor U.S. large-cap stocks, global real estate investment trusts, and gold.