The Federal Reserve
Has the Federal Reserve finished raising interest rates? On June 14th, the Fed announced they were going to maintain rates as is, keeping the Federal Funds target rate at 5%-5.25%. Wall Street is calling the announcement a “hawkish” hold as Powell reiterated the need for potentially further increases throughout the year. Remember, the goal of the Fed is to rein in inflation back to their target rate of 2%. Several Wall Street economists believe inflation will stay above 4% this year. Any further attempts by the Fed to lower inflation by continued rate increases may drive the U.S. economy into a recession. They are walking a tightrope and any mistake can have profound consequences.
Barron’s reports, June 19th, unemployment is at 3.7% based on May’s reading, which is below the forecast of 4.5% by year’s end. A stronger labor market may give the Fed reason to hike rates again to keep wage growth from accelerating, which is inflationary. Barron’s goes on to report, inflation is now expected to be revised upward from the 3.6% year end projection. Core PCE, or Core Personal Expenditures, something the Fed follows very closely, is now at 4.3% for the past three months through April.
Odds are now favoring, two to one, that the Fed will raise rates by twenty-five basis points in July. The fear is the Fed will be forced to raise their target rate to 6% to slow inflation, which would cause unemployment to rise to 4%. Higher unemployment would be politically unpopular by the Democrats in an upcoming 2024 Presidential election year.
Stocks and Bonds
The Nasdaq index, propelled by technology stocks, is trading at a 14th month high, up 30% for the year as of June 19th, closing at 13,689. The S&P 500 is trading at 4,409, up 14.85%. The gains in the S&P this year have been propelled by a handful of technology stocks: Apple, Microsoft, Nvidia and Facebook. The DOW for the year is positive only 3.48%, trading at 34,299 as investors race back into technology after the terrible year last year as the Fed continued to raise interest rates.
Bonds this year are recovering from the rut of last year. The Aggregate Bond index is positive 2.38% YTD. The high yield bond sector is positive around 5%. As the stock market recovers, high yield bonds tend to do well.
Artificial Intelligence, Communication and Technology
AI is generating a lot of interest and investment on Wall Street this year. In his own blog post, venture capitalist Marc Andreessen claims that, “AI is the most important thing civilization has created, certainly on par with electricity.” Most of us by now have heard or read about ChatGPT, Microsoft has invested in OpenAI(the company that owns ChatGPT), to gain access to the technology, and recently added to their search engine, Bing. Microsoft stock is up over 35% this year since the hype. Nvidia, the chip maker for AI, has seen its stock rise 163% YTD on blowout sales of is AI chips. Facebook or Meta stock is up 120% YTD, announcing they will weave generational AI into their company. Google announced they will be adding AI to their search engine.
How important is branding your company to show you are a technology driven company? Jack Hough writes in Barron’s that a study completed by Purdue University, looked at 95 companies that added .com, .net, or Internet to their names and found the average stock gain was 74% during the ten days surrounding the announcement. Guess it is pretty important!
Singapore based investment firm, StashAway, quoted research from MIT economist David Anter pointing out that 60% of workers today are employed in jobs that did not exist in 1940! Technology being the driver of new job creation.
In the same article, Goldman Sachs stated that “AI could translate to a 30% increase in the S&P 500 over the next decade.” They also said AI is expected to add trillions of dollars to the global GDP. GS projects a $7 trillion lift over the next decade.
McKinseyResearch estimates generational AI could add up to $4 trillion annually to the global economy.
Our Test
We recently went on the Bing search engine and used their ChatGPT integration. You can’t not be impressed by the speed of its response. Here is just a sample… we asked “What is the economic forecast in the U.S. for the remainder of 2023?”
The response time for our inquiry was about 2 seconds.
“The economic outlook for the U.S. for the rest of the year is being defined by decelerating growth, rapid monetary tightening, and moderating inflation. Healthy consumer and business balance sheets, however, could keep some momentum. According to J.P. Mogan, the U.S. economy is facing decelerating growth along with moderating inflation. The Conference Board predicts that the economic outlook has deteriorated under the weight of high inflation rates and rapid monetary tightening. The U.S Chamber of Commerce recently convened its Chief Economists Committee from member businesses and predicted a mild short recession is likely later this year.”
It is amazing how fast ChatGPT gathered that information and sent a response like we were having a conversation.
Several major companies are now adding AI technology into their business. Campbell Soup just introduced a new soup “Chunky Ghost Pepper Chicken Noodle” that was born from AI. Kraft and Kimberly Clark also are mentioned as embracing AI.
The RMR Investment Committee, continues to monitor markets and prudently make changes in our models when we believe change is necessary. Developments in AI and Technology continue to keep us overweighted towards growth equity as we see a bright future for value creation in these areas. Please feel free to contact your advisor with any questions you may have.