Last quarter, our technology stocks performed very well due in large part to our emphasis on AI. Nvidia, the dominant supplier of GPU chips used in AI was the driver of those gains and eventually became overvalued and becoming destined to return to reality as is now happening. This recent retreat was instigated in part by two factors. The first is, because of ongoing economic strength and stubborn inflation the Fed began overtly tamping down expectations for any interest rate reductions this year. The effect on the markets was instantaneous. The second is that strong demand in the AI sector that had caused backlogs in order for chips and equipment, has abated along with unrealistic expectations for growth and earnings. Even though the backlogs have diminished, and prices are retreating, the sector remains very strong. AI has the capability to greatly enhance efficiencies in manufacturing, productivity, earnings, and to also increase jobs in nearly every facet of the economy.
The overall economy remains robust and seems to be impervious to recent year’s interest rate hikes by the Fed. Where analysts were previously debating between economic soft landing or hard landing, the new debate is now whether there will be any landing at all. Subsiding inflation has become surprisingly stubborn as it approaches the Fed’s target level. Unemployment remains at historically low levels. Job creation is as strong as any job market in memory. The housing market remains robust even in the face of elevated interest rates, and new construction can barely keep up with demand. The fiscal stimulus from Congress in the form of the Infrastructure and the Chips and Science legislation cannot be overstated in driving the economy forward even in the face of the Fed’s efforts to slow the economy to finally reach its inflation targets. It seems apparent at this point that even higher interest rates won’t help, because, for the first time in decades, those higher interest rates are now putting money in the pockets of savers, money which they seem to have a propensity to spend.
Your account has realized impressive gains so far this year as a return in the first quarter that would ordinarily be impressive for a full year. But as we await further stabilization and normalization in our overweighted semiconductor industry, we are assured that the economy is experiencing the strongest and most stable growth in a generation thanks to previous covid stimulus and now fiscal stimulus. Keep in mind that there are other economic and market risks and complications in the form of regional military conflicts that are threatening to escalate into wider conflations. The extent of these and the effects are utterly unpredictable. What is certain is that they introduce many risks and volatility into the markets and uncertainty into the economy.
As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
Very Best Regards,
Joseph L. Toronto, CFA
Read more: 1st Quarter Update Summary – Still Waiting for Landing
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