Insights & Thoughts

4th quarter commentary

Welcome to the Future

Jan 30, 2024 | Quarterly Commentary

As we bid farewell to 2023, it’s time to reflect on a year that defied expectations.  Despite initial reservations fueled by the double-digit declines in 2022 and the Federal Reserve’s ongoing rate increases, 2023 turned out to be a stellar year for investors.  The stock market reclaimed all its losses from the previous year and bond yields rose to levels not seen since before the financial crisis, giving income investors much needed relief.  Even the most optimistic forecasts for 2023 were only expecting modest gains. Instead, the S&P 500 finished the year up over 24%.

While gains were seen across all sectors of the stock market, the distribution was uneven among various sectors and market caps.  The largest market cap indices dominated the performance charts due to the incredible rise in the tech sector. We’ve mentioned before that a handful of tech giants have been dominating the S&P 500 index weighting for several years lately.  This trend became even more pronounced in 2023.  Six stocks (Microsoft, Apple, Amazon, Nvidia, Google and Meta) now comprise close to 30% of the S&P 500 index and those stocks experienced massive growth during the year.  Over half of the S&P 500’s performance could be attributed to these six companies alone.

The overall market gains were mostly driven by the belief that the Fed’s aggressive policies were not going to lead to a recession and instead we would see a “soft landing” of the economic slowdown. Inflation continued to drop from a high of 9% in 2022 to around 4% today.  4% is still above the Fed’s target, but less than half what it was at the peak in 2022.  Employment remains healthy as does GDP growth, even after 11 rate increases.

A striking statistic emerges when comparing large cap indices to others. The S&P 100, being the largest major index by market cap, soared almost 33% in 2023, outpacing the roughly 16% gains in both the mid-cap and small-cap sectors. This substantial difference is attributed to the tech giants mentioned earlier, with the prices of those stocks experiencing remarkable increases ranging between 50 and 240 percent in 2023.

This leads us to the next big thing in 2023 – the rise of AI.  The reason these six companies and others like them have experienced such phenomenal growth is due to their involvement in the development of artificial intelligence.  This field of research has made tremendous progress in recent years, but 2023 seems to have been a real breakout year for this technology.  The world was introduced to and was able to interact with this amazing technology via an AI platform called ChatGPT.

In most people’s minds, the idea of a super intelligent and possibly sentient technology is something in science fiction movies about the far-off future.  It now appears the future is upon us and the markets are excited about the prospects for any firm involved in this emerging technology.  AI-related stocks clearly present unprecedented investment opportunities, it also raises important questions about the broader societal implications of this technological revolution. The rapid integration of AI into various aspects of the economy may have far-reaching consequences that extend beyond the financial markets. As AI becomes increasingly sophisticated, discussions about ethical considerations, job displacement, and privacy concerns become paramount.

The allure of AI lies not only in its potential to revolutionize industries, but also in its capacity to reshape our daily lives. From personalized recommendations and virtual assistants to autonomous vehicles and advanced medical diagnostics, AI is permeating diverse sectors. Investors are keenly aware of the transformative power of this technology, and the market reflects this enthusiasm.

The rise of AI is not merely a speculative investment theme; it represents a paradigm shift that demands thoughtful consideration. As we move forward into an AI-driven future, investors, policymakers, and society at large must collaborate to ensure that the benefits of AI are harnessed responsibly and ethically since the unintended consequences and rewards are hard to grasp with something this powerful.


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