Tug of War
For those of us in the United States, we have just finished up the 4th of July holiday filled with cookouts, fireworks, and maybe some old-fashioned field games like tug of war. For investors, the U.S. stock market really feels like it is in a tug-of-war with the economy. Large-cap technology companies geared toward artificial intelligence are on one side of the rope pulling strong, and a slowing economy with a risk of recession is on the other side of the rope. So far, large-cap technology companies are winning.
As of May 31st, 100% of the year’s gain in the S&P 500 could be attributed to just seven stocks—Apple, Microsoft, Google, Amazon, Nvidia, Tesla, and Meta. The remaining 493 stocks in the S&P 500 experienced a negative year-to-date return. But in June, the rally began to slowly broaden beyond those seven names. This is a healthy sign for the market and was necessary for the continuation of the rally.
We believe this rally may have a longer runway. Investors have a significant amount of cash sitting on the sidelines. If the rally continues to broaden, investors will likely move off the sidelines and put some of that cash into the equity markets, driving prices higher. Recession risks are still elevated but so far, the economy continues to grind ever so slightly higher and push out the recession timeline.
The second half of the year may be choppy, but our expectation is that we will end the year higher. Our favorite investment themes are technology with a bent toward areas that will participate in artificial intelligence and 5G expansion; companies benefitting from the infrastructure rebuild in the U.S., including those in the natural resource areas; and companies who benefit from spending by millennials and baby boomers.
As noted above, the seven large-cap companies associated with artificial intelligence led the market in the first half of the year. Artificial intelligence (AI) has been around for some time. AI at its basic level is a branch of computer science that uses algorithms or systems to process data, learn, predict, and solve problems. Examples of AI in daily use would be Apple’s Siri, Alphabet’s Google Assist and Amazon’s Alexa that are designed to tackle one mundane task at a time by processing a specific data set.
More complex tasks, such as creating images, video, software code and coherent written text called generative AI require more processor-intensive systems. ChatGPT, a computer program powered by generative AI sent shockwaves through the tech sphere last year with its ability to accurately simulate human conversation. ChatGPT has many optimistic that the underlying technology will greatly enhance productivity and increase global economic growth by performing intelligent tasks, such as learning and reasoning in ways similar to a human. There was a good segment about AI on 60 Minutes a couple of months ago, here is a link should you wish to watch it. The Revolution by 60 Minutes.
Artificial Intelligence is prevalent in nearly every company and most of our investments. For example, we hold Deere & Co. in our Growth Portfolio. John Deere has evolved from an image of gas-guzzling tractors and equipment to precision agriculture with zero-emission electric tractors, autonomous and semi-autonomous self-driving tractors, and drones, to using AI in their See & Spray technology, where high-resolution cameras capture 20 images per second. Based on the images and artificial intelligence, the system recognizes the difference between cultivated plants and weeds so that individual plants can be specifically treated. With this new generation of weed control, the use of pesticides can be significantly reduced.
With any new disruptive technology, there will be fits and starts to the investment theme. If AI realizes its potential, it will displace some businesses—much like the automobile displaced the horse-drawn carriage. While valuations for these companies have grown rapidly this year, this is a long-term investment theme with the potential for very strong upside. We hold positions in individual companies and broad ETFs focused on AI so you will participate in this investment opportunity. We will do deeper dives into some of those companies in the future.
In summary, the equity market rally was relatively narrow until June of this year, when it began to broaden. Greater participation from more companies will give this rally legs and cause some cash on the sidelines to get invested for fear of missing out. The economy continues to chug along, but recession risks are still elevated. We expect a choppy rest of the year but to end the year higher.
We will use market pullbacks to add to our long-term investments in areas such as AI, infrastructure rebuild, and companies that benefit from strong demographic trends.
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Interesting news…
Did you know that earlier this year the IRS changed the way irrevocable trusts are treated for tax purposes? This change could have a meaningful impact on your estate plan. Here is a link to a useful article that describes this change:
IRS Quietly Changed the Rules on Your Children’s Inheritance | Kiplinger
If you have not reviewed your estate plan in some time, we recommend you do so. We are happy to attend any meetings with your estate attorney to ensure that your accounts align with your estate plan. The risk of a costly error is much less when there is full transparency between all of your key advisors.
Riggs News…
Phase One of Riggs’ restoration of the Grand Highlands is near completion. In April, we moved down to our new offices. We look forward to welcoming you to the newly renovated space!
We are happy to announce that Riggs Team Member, Elizabeth Graham, was recently appointed to the advisory board of FNCB Bank (NASDAQ: FNCB).
Riggs Team Member, John Baum, recently flew his 1944 Boeing Stearman along the NYC skyline. To read more about this very cool adventure, click here.
