- The appreciation of the S&P in 2023 remains very concentrated in primarily seven U.S. technology companies that have made commitments to develop their AI capabilities. The “narrow leadership” of such a small number of stocks has the potential to create future market volatility.
- We expect both inflation and economic growth to moderate further in the coming quarters as the cumulative impact of interest rate hikes comes to fruition. A relatively mild recession in early 2024 may be the base case, but a ‘soft landing’ is still not off the table.
We hope your summer was enjoyable and relaxing.
Despite a decelerating American economy, the S&P 500 index has delivered robust returns in the first 8 months of the year. With the release of the ChatGPT artificial intelligence website, Wall Street has become enamored with “AI” and its potential to increase efficiencies and productivity for businesses around the world. The appreciation of the S&P in 2023 remains very concentrated in primarily seven U.S. technology companies that have made commitments to develop their AI capabilities. Those top seven stocks presently make up 28% of the S&P 500 index and have contributed 65% of the S&P 500’s returns year to date. The “narrow leadership” of such a small number of stocks has the potential to create future market volatility.
We are confident peak inflation is behind us and expect both inflation and economic growth to moderate further in the coming quarters. Chairman of the U.S. Federal Reserve, Jerome Powell’s, recent comments in Jackson Hole were more hawkish than investors were expecting. He let the world know our central bank will not hesitate to raise interest rates further to bring inflation down to its 2% target. The financial markets are expecting another .25% point increase before year-end. Rapid interest rate hikes have historically taken a while to trickle through economies. We anticipate the economic impact of the aggressive pace of interest rate increases over the last 18 months will likely intensify in the months ahead. Cumulatively, higher rates should contribute to further slowing of the economy and increases in financial market volatility.
Meanwhile, the U.S. economy continues to show resilience, albeit, while growing more slowly. We are expecting a relatively mild recession in early 2024, but a ‘soft landing’ is still not off the table. We have “neutral” allocations to stocks with a focus on industries that have historically performed well in economic slowdowns. Our “cash” allocations in money markets are larger than normal and currently earning 5%+ yields. We plan on redeploying those cash balances back into stocks and bonds over the upcoming quarters.