Market Insight Q2 2023
As we close the 2nd Quarter of 2023, two letters have dominated headlines and helped propel the S&P 500 and NASDAQ indices into bull market territory – AI. The history of Artificial Intelligence (“AI”) extends well before the November 2022 introduction of ChatGPT (machine learning was introduced in the 1950s), but with recent advances in computer processing, big data storage, and cloud computing, generative AI is likely to become the next wave of innovation and monetization within the global economy. The mega-growth companies enabling the AI boom have been meaningful winners year-to-date, causing the largest underperformance of dividend stocks versus the S&P 500 since the dot-com bubble in 1999.
While the introduction of the internet revolutionized the way we communicate, work, and access information, artificial intelligence goes a step further by enabling routine task automation and decision-making. To the extent AI will help spur productivity and profit gains across sectors of the market, we are cognizant of the threats felt by domestic and global regulators on data privacy, intellectual property, and especially workforce retention at a time when corporate profits as a share of U.S. GDP are rising.
Coming into the year, 2023 was one of the very few years where market pundits directed investors to the sidelines and predicted a negative S&P 500 market return. However, halfway through 2023 market-cap weighted indices have refuted this expectation with the S&P 500 posting a double-digit total return through June. The pursuit of market timing has historically yielded little success with the “Market Timing Hall of Fame” remaining empty. Consequently, those waiting for a stock market bottom are now beginning to chase rallies, particularly in equity sectors like Technology and Consumer Discretionary that have significantly outperformed year-to-date.
Equity market inflows to outperforming sectors are somewhat akin to investors acting like “bad shoppers.” Behavioral finance suggests that the herding effect and loss aversion contribute to ‘buy’ decisions often when equity prices and valuations are high; ‘sell’ decisions tend to come when prices decline. These psychological influences can affect investor behavior and often impact market flows, contrary to “good shopper” behavior. At Ricketts Financial, we are committed to remaining fully invested and believe that a consistent strategy and long-term approach allow us to avoid the pitfalls of market timing. In addition, we remain fully invested because time in the market, not timing the market, builds wealth. We believe our disciplined investment approach should afford our clients reasonably stable cash flows to support their goals, a favorable risk-adjusted return profile over a full market cycle, and a measure of protection from the “unknowns” inevitably encountered on the path of wealth creation.
As for the fixed-income markets, the U.S. Treasury yield curve approached its most inverted level in decades at the end of June as expectations increased for the Fed to hike one or two more times before year-end. The inversion touched 110bps (basis points) in March and near that last week — levels last seen in the early 1980s. The Fed left rates unchanged in June after 10 straight rate increases. While the labor market remains strong, the impact of stronger-than-expected economic data has added volatility. Fixed income markets reversed course from a strong first quarter (Q1) as virtually all fixed income assets, with the exception of high yield, had negative returns in Q2.
As always, please do not hesitate to reach out with any questions. We are continually humbled by the opportunity to manage capital in a responsible way and deliver exceptional service to our clients. We extend our sincere gratitude for your continued loyalty and trust.