I hope this finds you well in the New Year. Below are my thoughts on the current market climate.
Let me start by saying the economy looks strong, consumers continue to spend, inflation is slowly coming down, consumer confidence is trending up, unemployment remains low and many continue to travel and play catch up on the missed experiences during the pandemic period. All of this is occurring despite a suppressed residential real estate market due to high interest rates. I highlight this as the American consumer is generally 70% of the US economy, and residential real estate typically is a large component of that. When looking at the big picture, I am optimistic on the path forward. The Fed may lower rates as the year progresses if the current higher rates start materially slowing down the economy. Lower rates would likely kickstart the residential real estate market again.
There are a lot of asset classes that we invest in that look extremely attractive from a historical valuation standpoint, with the one exception being US Large Cap Growth stocks and the technology sector. As we wrap up the second month of the New Year (2024) and I reflect on the stock market’s performance in 2023, I am having a sense of déjà vu. I started my financial career at Vanguard in 1995, just as the internet and technology wave began. The internet was new, email was new and smart phones did not yet exist. Day trading became a thing as people could stay home and trade technology stocks and ride the momentum wave. From 1995 to 1999 technology and internet related stocks rapidly dominated the S&P 500 leading to the following performance by the S&P 500 over that time:
1995 +37.20%
1996 +22.68%
1997 +33.10%
1998 +28.34%
1999 +29.89%
That five-year window was one of the greatest performance periods in US stock market history. It also led to a great hangover in specifically the Large Cap US Growth portion of the market as the S&P 500 had three following years of negative performance:
2000 -9.03%
2001 -11.85%
2002 -21.97%
I recall it being a three-year prolonged slow bleed for the S&P 500. While the Nasdaq 100, which was almost pure technology and internet stocks, proceeded to lose 80% of its value over that same three-year timeframe.
While the S&P 500 lost money for three years in a row during that downturn period, globally diversified portfolios, similar to how we invest today, prospered.
Back in the late 1990s, most of us didn’t understand what the internet actually was, and how much of an importance it would ultimately have in our lives. Our understanding of its importance occurred in the late 2000s, a decade after the tech bubble burst. Similar to today, AI or Artificial Intelligence is the new technology hype. We know it’s a potentially amazing technology, but similar to what the internet was in the late 1990s, we likely won’t really understand it’s full impact for another decade as it becomes fully assimilated into technology platforms, and our personal and work lives.
Nonetheless, AI and related technology has become an all-consuming topic of Wall Street, the business world, retail investors and stock traders hoping to capitalize on the next big thing.
The temptation to chase performance and what is hot in the markets reminds me of one of my favorite financial quotes:
“The stock market is a device for transferring money from the impatient to the patient.”
Warren Buffet
FOMO “the fear of missing out” is a real thing, I can’t tell you how many people I have run across in my life that became impatient, tried to manufacture returns by chasing hot investments, only for it to ultimately collapse and wipe away their hard-earned savings. We saw it in the late 90s tech bubble, the residential real estate bubble in the mid-to-late 2000s, the crypto/NFT bubble a couple of years ago, and it could happen again if this next technology/AI wave continues on a runaway growth path.
The S&P 500 is approximately 70% of the total value of all public stocks in the United States. To understand how much influence technology and AI companies have become in our overall economy, all we need to do is look at the S&P 500 and its current top 10 stock holdings as of 2/23/2024:
| Top 10 Holdings in the S&P 500 | % Weight of the S&P 500 |
| Microsoft Corporation | 7.13% |
| Apple Inc. | 6.36% |
| NVIDIA Corporation | 3.98% |
| Amazon.com Inc. | 3.66% |
| Meta Platforms Inc. Class A | 2.48% |
| Alphabet Inc. Class A | 2.01% |
| Berkshire Hathaway Inc. Class B | 1.78% |
| Alphabet Inc. Class C | 1.71% |
| Eli Lilly and Company | 1.42% |
| Broadcom | 1.29% |
Source: YCharts.com
Do you see a trend? Eight of the top ten stocks are all technology and AI related. Microsoft at #1 has invested over $13 billion in the AI company OpenAI that created ChatGPT. NVIDIA, #3, is the predominant maker of GPU chips (Graphic Processing Units) that currently power all the AI Large Language Models (LLMS). If you haven’t heard the terms AI or LLMs, you soon will.
Those top eight technology related stocks are approximately 28.6% of the S&P 500, which is made up of 500 total stocks! When you include all the other tech stocks in the remaining 492 of the S&P 500, Information Technology totals 30% of the S&P 500. It’s clearly becoming concentrated in technology again.
For comparison purposes, during the last technology bubble peak in 2000, technology was 33% of the S&P 500 Index. By 2003, at the bottom of the technology collapse, it was 14% of the index.
As exciting as it can be to watch many of these technology companies and the S&P 500 outperform, the most important thing we can do at this time is to remain globally diversified. We have plenty of technology/AI exposure already in the portfolios I manage for clients due to our exposure to the S&P 500 via all our various US Large Cap and US Core stock mutual funds and ETFs. I would caution anyone attempting to double down on that exposure by trying to buy concentrated technology/AI individual stocks or technology/AI sector holdings.
What I don’t know, and no one knows, is if this AI/technology growth trend is possibly a repeat or rhyme of the internet/technology wave of the mid to late 1990s that ultimately led to a large bubble, or is this just a byproduct of technology becoming more and more a part of our everyday lives and the US economy? Only time will tell. One positive thing I will say about the current technology wave is that these top technology stocks also have record earnings that can be used to justify their lofty valuations. Quite frankly, we have never seen companies as profitable as Microsoft, Apple, Google and Amazon in the history of the markets. Not only are they extremely profitable, but the top thirteen stocks of the S&P 500 collectively have over $1 trillion of cash sitting on their balance sheets. In comparison, many of the technology stocks during the late 1990s bubble were highly unprofitable, had minimal earnings and no excess cash on hand.
Although Technology and the S&P 500 has led the charge recently, we are also seeing signs of the market starting to broaden out. This bodes well for our globally diversified portfolios. International stocks, Emerging Markets stocks, US Small Cap stocks, and US Large Value stocks are all positive for the year and moving in the right direction. Japan, represented by the Nikkei Index, has been in a slumber for decades. It is actually the highest performing international country this year so far and recently hit an all-time high. So, while Technology and AI keep dominating the media headlines and the S&P 500, it’s a positive sign to see so many other asset classes also moving in the right direction.
