I learned in my first few days on a bond trading desk on Wall Street the meaning of several expressions that describe the essential state of the market. Simple terms that rise above the din of that day's newsflow as markets go through cycles of bearish and bullish exaggeration.
One of those terms is bid. The market is BID. This week, the month, this year, TECH has been bid.
The Chart below is one of my favorite tools to visualize the stocks and sectors that make up what we collectively refer to as "stocks" or "equities." Hit this link. You can see the whole market in one picture, on a daily, monthly, or yearly basis.
As a Macro trader, I approach the markets from the “top down.” As a Macro writer, my goal is to help my Macro reader translate the cacophony of catchphrases and buzzwords into actionable portfolio planning. When interest rates go up, we do not want to own long-duration bonds or stocks priced for growth. When the economy is poised to accelerate, we want to own commodities and materials. When the economy is poised to decelerate, like now, we want to own bonds. And so on.
This year, we need to look further down into the Micro, and this year, the stock market is BID because of Tech, and Tech is BID because of AI.
The overall S&P 500 Index is up 8.70% this year, led by tech giants Microsoft (+32.74%), Nividia (113.9%), Apple (+34.8%), Google (+39.14%), and Meta, formerly Facebook (+104.12%). If you had invested in the S&P without these five stocks, your return would be negative.
My best friend in high school, Class of 1981, went on to get a doctorate in Artificial Intelligence at Harvard, more than thirty years ago. AI is not new. What happened in the last six months that made AI technological evolution an investment revolution?
Without going into detail, I have an uncommon disorder called parosmia, which many long covid patients have developed, although I never had covid but did take the vaccine. Wherever it came from, it is an insidious condition that distorts taste and smells. Garlic and onions, for example, taste like cardboard and garbage. The scientific community has yet to discover how to cure it, but there is a treatment that anecdotally has had some success. It is called Stellate Ganglion Block (SGB) and has been used for a hundred years to treat pain.
Regular Google was unable to locate a nearby clinic where SGB is available. Although accepted, it is an esoteric procedure. I tried ChatGPT, the free AI text-to-text model that was made public last November and has made the world AI crazy.
I typed: "Where can I get Stellate Ganglion Block in Northern Virginia?" and the name and address of a clinic appeared. I had a consultation with the doctor on Friday and scheduled my first SGB treatment for next week. GDP grew thanks to GPT!
I repeated the query in ChatGPT today, so I could print it here for you. This is what I got:
AI has a long way to go, but the fact that it is charming investors is not to be dismissed.
Here is a good list of AI applications from Electronic Design:
· Robotics: With the continuous need for hardware advances in state-of-the-art robots, AI chips are sure to make a world of difference. They also can power applications in computational imaging for drones, etc.
· Wearables: AI is a tremendous asset when it comes to wearable technologies. For instance, AI can assess speech patterns, moods, and heartbeats and inform the user with warning signals. In addition, it helps the user improve performance in sports, etc.
· Natural language processing (NLP): Demand for analyzing user conversations and messages is growing due to the rise of chatbots, assistants, and online messengers such as Whatsapp, Slack, etc.
· Computer vision: In-vehicle assistance from computers is another application that's quickly ramping up. Major companies like BMW, Ford, and Tesla are banking on the security aspect by aiding the driver using AI. And, of course, autonomous cars are undergoing continuous testing using the combination of AI and ML. For example, in May 2022, Intel announced that it was aiding the driver using AI. And, of course, autonomous cars are undergoing continuous testing using the combination of AI and ML. For example, in May 2022, Intel announced that it was leveraging Habana's AI chips to train self-driving cars.
· Retail: Apart from the security systems at shopping malls, it helps the retail market with material storing, shelf management, storage management, and transport.
· Healthcare: Assessing and monitoring patients' health forms is a big part of treatments for patients. AI warns healthcare workers about the deterioration of a patient's health, quickly alerting them to provide proper treatment.
If these are some of the use cases, what are some of the industries and companies that are positioned to increase revenues, margins, and their stock price on the back of AI?
This is from Vyrian:
The global AI market is forecast to grow to $390.9 billion by 2025, representing a compound annual growth rate of 55.6 percent over that short period. Hardware lies at the foundation of each AI application.
Storage will see the highest growth, but the semiconductor industry will reap the most profit by supplying computing, memory, and networking solutions. Demand for semiconductor chips will mirror the rapid ascent of the AI market.
On the chart below, the blue line and the orange line represent Semiconductors and Hardware within the Technology Sector of the S&P. Gains have topped thirty percent for both.
Going into 2023, my primary investment theme was "QT" and not “AI.” QT is quantitative tightening, another gradual process that affects asset prices. To keep the US out of a prolonged Covid Recession, the Federal Reserve “printed money” and bought bonds from the open market, injecting trillions of dollars into the banking system while Congress pitched in with never before heard of fiscal spending.
When inflation headed to double digits as a result of this monetary and fiscal generosity, the Fed stopped buying and is allowing its portfolio to “run-off.” As the bonds pay back interest and principal, that money is not reinvested.
Overall liquidity available for risk-taking diminishes. The premium investors need to assume risk increases and the price of risky assets fall, a mirror image of the stock and bond market rallies witnessed when the Fed was buying its bonds during and after Covid.
Oddly, the rolling regional banking crisis, described in this post called Life on Mars, has had a short-term effect on reducing the speed of Quantitative Tightening. To stabilize the banking system in March after the failure of Silicon Valley Bank, the Fed provided instant liquidity for the troubled bond portfolios of other banks, effectively relubricating the system, and delaying the effects of QT.
The divergence in returns between Tech and non-Tech stocks supports the validity of both the AI and the QT investment themes. One of the most difficult parts of investing is not just picking the right race to watch (which asset class), but picking the right horse to bet on (which sector, which company).
Look at your portfolios year to date. If you were underweight Tech, your return is most likely close to Money Market rates. If you were long just the energy sector, you would be down by more than ten percent. And regional banks, down thirty percent!
As for me, Long Tech and Short the Rest ™ was a career trade that I missed, but the team continues here cranking out research posts like this one and holding long-duration bonds because the economy will slow down.
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Congrats David ... your thoughts are always helpfull ...