Hope everyone is off to a good start to the New Year! Things sure do change fast. My last commentary was me whining about the third quarter. Tree fell in my yard, my dog died, markets were terrible. This year has started great. I had a nice getaway skiing with the family up at Big White; we have a new puppy on the way, and I just found out the Advisor Summit for WSI is in the Grand Caymans this year. I am almost scared to comment on how strong markets have been. By the time my last commentary went out in November, markets had already bounced and they have continued their good run through January.
I am afraid to jinx it!
If you made it through the last few years of market gyrations without panicking, congratulations on surviving a couple of the most volatile periods we have ever seen regarding market returns. It gets easier if you keep lifting weights, not because the weight gets lighter, but because you get stronger. The more resilient your mindset regarding investing through the gyrations of markets, the greater the likelihood of long-term financial success. It has been heavy lifting the last few years, but I like to think we are better investors because of it!
The current central narrative continues to focus on the theme of artificial intelligence. As much as I expected it to be a big story, the speed at which it moves through business is astounding. It is the biggest thing I have seen impacting productivity since E-commerce.
I was talking to one of my clients a few weeks ago who works for Amazon, and he was saying that Amazon sees AI as being to data what automation is to labor. It is very hard to understate how impactful AI is. I have a diverse group of clients in terms of the differing jobs and businesses they represent. Still, almost every one of them is seeing transformational changes in productivity because of AI.
We have never gone through a round of rate hikes as severe as last year, where it hasn’t pushed the economy into recession, but the sentiment right now is that we are coming in for a soft landing in economic terms. As much as businesses would have wanted to hold onto their dollars and hunker down in expectation of slowing spending, they were forced to spend on AI to keep up with their peers. They were then rewarded with increases in productivity through improvements in client servicing, fraud prevention, and targeted advertising.
The tech giants had a considerable head start in the AI space and dominated the economic landscape in 2023. Meta, Nvidia, Microsoft, Amazon, Tesla, Apple, and Google were up over 100% collectively last year. This was partly due to their AI-related earnings but also because the implementation of AI in their businesses allowed them to cut costs aggressively.
It leaves us in a bit of a weird space economically right now. Low unemployment, inflation coming down, a resilient economy, and a strong year in the stock market would lead you to believe that everything is fine. However, despite the broad-based numbers looking good, it is a very narrow part of the economy that is doing well. The boom in AI masked the fact that a lot of businesses are struggling.
72% of stocks on the S&P 500 underperformed the index last year – a record that highlights this divergence and led to one of the weirdest bull markets I have ever seen. AI is like a one-legged stool propping everything up right now.
It is a strong leg but creates a problem when balancing out portfolios. Do you let the clear winners run in an area part of a longer-term megatrend, or do you trim and rebalance to mitigate portfolio downsides?
I love to read. I read a lot of fiction for enjoyment, and I read a lot for work and to keep myself educated. I used to read many nonfiction books in many different areas – business, investing, psychology, motivation, and productivity. Then, about 20 years ago, I discovered book summary subscriptions. I could get a 15-minute summary of all the best-selling nonfiction books on the market – it’s fantastic! I started with a “CD” service that mailed me ten summaries a month (younger clients, you may have to ask your parents what a CD is!), and now I have a subscription to the Blinkist app.
Knowing I have already “read” 20 books this year makes me feel smart!
But a good meme is even better than a book summary for giving you that one succinct sound bite of practical wisdom. My social media feeds are filled with motivational quotes and inspirational messaging. I must diligently plow through countless word salad platitudes in my feeds to find one that resonates (this is how I justify how much time I spend scrolling!), but I did love the “choose your hard” memes.
It applies to so many different areas. Save now or be broke later – choose your hard. Work out or be weak – choose your hard. Work in practice or lose the game on the weekend – choose your hard. You get the idea.
I have read more than a few books on finding your optimum stress level. That ideal level that everyone is looking for that leads to growth without overloading your anxiety. In finance, this adapts to investor questionnaires that we use to find that balance between risk and reward that magically gives you the ideal mix of investments. I don’t really believe it is possible. What we are asking is to “choose your hard’.
Accept more volatility in your accounts to achieve a higher rate of return, or accept that you will have to come up with more savings to reach your financial goals, or accept that you will have to adjust your retirement lifestyle or work longer.
Sometimes, your choices don’t even matter. Life is too complex and fluid for there to be any exact formula for suitability.
The world throws you too many curve balls for you to ever be truly in control, and as much as I love a good mantra, I don’t think your entire life philosophy should be able to be distilled into a fortune cookie. Some things you do get to choose your hard. The tradeoff between work/rest balance, risk/reward, and safety/growth is real, and your choices have consequences, but the message I take away is that you need to prepare for “hard” no matter what!
I love to ski. Every time I go up a lift, I get to choose whether or not I come back down a more challenging or more manageable run. I have skied some pretty gnarly terrain this year, but my worst fall this season came on a great powder day where I was cruising through the trees on a relatively gentle grade, and my skis got caught in the snow, and I was ejected into shoulder-deep powder. I have control over which run I go down, but no matter your choices, sometimes you can’t avoid getting hit hard!
Markets right now look good. The run-up in AI has given the economy a boost, which, so far to date, has allowed markets to fight through the restrictive macroeconomic policies (higher rates!) that governments have put in to fight inflation.
With inflation numbers easing, the more popular viewpoint in economic circles is that interest rates will drop this year. This would be a dramatic shift from the economy fighting against macroeconomic headwinds to getting a boost.
AI is a transformational technology that did well in a poor macroeconomic environment. We are at another inflection point whereby technology will continue to grow faster than the rest of the economy and an easing economic policy shift should accelerate that trend even further.
The growth in AI is unpredictable, and we don’t know where it will take us, but I am confident in its durability in continuing to increase productivity. As interest rates drop, it will improve fundamentals in the many industries that lagged most of last year. To simplify, I am bullish on markets at the moment.
Offsetting the good economic news is the geopolitical environment. Over half the world goes to the polls this year, with elections forthcoming in most developed countries. The “highlight” of this is the US election, which promises to be an absolute circus. It is like we are watching reality TV. Suppose you were reading a Netflix summary of a show that indicated the story was about a presidential candidate running for election amid a trial, who needs to win the election so he could pardon himself and stay out of jail. In that case, you might just skip it as being too fantastical and flip over to “the cocaine godmother” or something equally outlandish. Yet this is the state of politics in what is ostensibly the most powerful country in the world!
And that is on top of the current world plot line where Ukraine and Russia are still at war, and Israel and Palestine are fighting. I don’t know how to put a risk metric around this year’s geopolitical uncertainty!
The only real good news here is that since it is very firmly outside our control, the best course of action is to focus on the fundamentals of companies and invest in businesses we expect to do well no matter who is in charge of the world.
So, the general takeaway is I plan to let our investments in tech and AI continue to run, where appropriate, with new money that is added in to accounts being considered for the undervalued sectors and companies with the potential for recovery as the macro environment improves. This is the top of my discussion list for reviewing client portfolios this quarter. Letting technology stocks run means more concentration risk in accounts, increasing volatility. It’s important to understand that risk/reward tradeoff to make sure you are comfortable with the strategy and it fits into individual goals and objectives. The run up in AI has been great, but there is no such thing as upward volatility – you have to choose your hard!
“Strong convictions, loosely held” is another expression I am pretty fond of. We have made choices and have a plan based on what we know today, because action is better than inaction, but we must adapt to what the world throws at us. It promises to be an interesting year watching world elections and where AI takes us, and I look forward to navigating the investment landscape with you!
If you’d like to set up a time to review your portfolio, you can click here to set something up:
https://calendly.com/jlow-financial-review/30-45-minutes
Stay safe, stay disciplined, stay positive. Happy February!
Jeremy
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