In observance of Independence Day, Guidance Wealth will be closing Monday, July 3rd at 1:00pm and reopening for normal office hours at 9:00am Wednesday, July 5th.
The Artificial Intelligence (AI) Express is traveling fast.
Investors are enthusiastic about AI. Late last year, an AI research lab introduced a chatbot that could answer questions – and people were enthralled. Within two months of its introduction, more than 100 million people had engaged with the technology, reported David Curry of Business of Apps. It wasn’t long before AI platforms that could generate images and audio, and help with coding were released.
It’s difficult to know whether investor enthusiasm influenced companies, but more firms mentioned artificial intelligence on recent quarterly earnings calls than ever before. AI mentions were up 77 percent during fourth quarter calls (after the chatbot was released) and reached an all-time high on the most recent round of calls, reported Jennifer Ryan of Bloomberg.
Between March 15 and May 25, AI was mentioned on the earnings calls of 110 companies in the Standard & Poor’s (S&P) 500 index, reported John Butters of FactSet. The sectors where AI was mentioned the most were:
Recent stock market gains have been attributable, primarily, to seven large stocks, five of which are in the IT and communication services sectors. Last week, as major U.S. stock indices gave back some gains, three of the companies finished the week higher and two outperformed the index, reported Al Root of Barron’s.
U.S. stocks dropped last week largely because investors didn’t like what Federal Reserve Chair Jerome Powell had to say. He suggested there could be more rate hikes this year, and that revived recession concerns, reported Stephen Culp of Reuters. Yields on most U.S. Treasuries finished the week unchanged or higher.
There is one decision all investors should make: how to allocate the money they’re investing. Asset allocation decisions are usually based on a myriad of factors: expected returns, potential volatility, and appetite for risk, among others.
Periodically rebalancing a portfolio’s allocation is a critical step, too, because it keeps portfolios from having too much or too little risk. For example, if a portfolio allocation of 60 percent stocks and 40 percent bonds is the goal, and stock market gains increase the portfolio’s exposure to stocks, then it may be time to rebalance the portfolio. Rebalancing means selling assets that have performed well and buying assets that have not performed as well to return the portfolio to the desired allocation.
Asset managers of all sizes rebalance their portfolios – and that could put a stutter in the step of the current market rally, reported Denitsa Tsekova of Bloomberg.
“Equities have outperformed bonds so far this quarter, leaving portfolio managers needing to cut their stocks exposure to meet their long-term targets…The pension and sovereign wealth funds that form the backbone of the investing community typically rebalance their market exposures every quarter to achieve a mix of 60% stocks and 40% bonds or a similar exposure. So far this quarter MSCI’s all-country stock index is up 5% while the Bloomberg global-aggregate bond index is down 1.3%.”
While rebalancing may affect stock markets, the current rally has gained momentum in recent weeks. In May, just 23 percent of the stocks in the Standard & Poor’s 500 Index outperformed the Index, reported Lauren Foster of Barron’s. In June, the rally broadened as companies in more sectors of the S&P 500 posted gains. In addition, the Russell 2000 Index, which reflects the performance of smaller companies, gained seven percent through mid-June, reported Joe Rennison of The New York Times.
Last week, major U.S. stock indices faltered on Friday after Federal Reserve (Fed) officials suggested more rate hikes could be ahead despite the Fed’s decision to pause in June. Regardless, the indices finished the week higher overall, reported Brian Evans and Alex Harring of CNBC. U.S. Treasuries delivered mixed performance.
Guidance Wealth will be closed on Monday, June 19th due to the stock market closure
Leaping over the wall of worry.
The “wall of worry” is an obstacle – or set of obstacles – that investors face. This year, the wall reached a considerable height as inflation, the War in Ukraine, United States-China tensions, slower earnings growth, the high cost of residential real estate, low demand for commercial real estate, tightening credit conditions, and other issues weighed on investor confidence and consumer sentiment.
But the wall is not as tall as it once was.
Last week, investors leaped right over the wall, and the Standard & Poor’s 500 Index headed into a new bull market. Please note, there is no technical definition for a bull market. No regulatory body declares that a bull market has begun. The rule of thumb is this: when an investment or index rises 20 percent from its previous low, then it is in a bull market, reported Chuck Mikolajczak of Reuters.
There is a caveat to this bull market. The bull has not been charging across all sectors. The primary beneficiaries of investors’ enthusiasm have been information technology, communication services, and consumer discretionary stocks, reported Jacob Sonenshine of Barron’s. He wrote:
“It’s a badly kept secret that the S&P 500’s gains have been driven by shares of Big Tech companies...The seven biggest stocks gained 77% this year through the end of May, while the average stock in the index dropped 1.2%. That ‘bad breadth,’ as it’s known on Wall Street, has many investors waiting for the market to collapse when tech finally falters.”
There are a lot of investors sitting on the sidelines, waiting for the right moment to re-enter the market. Barron’s reported that Bank of America’s survey of asset managers found that the average asset manager has about 6 percent of their portfolio in cash right now, up from 4 percent at the end of 2021.
In contrast, bullish sentiment among participants in the AAII Investor Survey, which many view as a contrarian indicator, was way up last week, jumping from 29.1 percent to 44.5 percent. Bearish sentiment dropped from 36.8 percent to 24.3 percent.
Last week, major U.S. stock indices moved higher last week, reported Nicholas Jasinski of Barron’s. Yields on ultra-short U.S. Treasuries fell last week, while yields on longer maturities of Treasuries rose.
As Gomer Pyle used to say, “Surprise, surprise, surprise!”
Gomer Pyle USMC was a popular American sitcom in the 1960s. It focused on a naïve, do-gooding auto mechanic from Mayberry RFD who joined the military. Gomer Pyle, the much-loved main character, was known for catchphrases such as shazam, golly, and surprise, surprise, surprise.
Surprise. Last week, the continued strength and resilience of the labor market was a revelation. The Federal Reserve has raised rates 10 times over the last 14 months, trying to slow economic growth and drive inflation lower, reported Jeff Cox of CNBC. In theory, higher rates should have cooled the labor market and led to higher unemployment rates. So far, that hasn’t happened.
Last week, the Job Openings and Labor Turnover Survey (JOLTS) showed the number of job openings in the United States increased from March to April, while the number of people separating from employers fell. Then, the Bureau of Labor Statistics’ employment report showed that more jobs were created in May than anyone anticipated.
Surprise. It was also surprising that investors took the news about labor markets in stride. Economic data suggesting the economy remains strong could cause the Fed to raise rates again in June rather than taking a pause as many hope it will. Nicholas Jasinski of Barron’s offered a possible explanation.
“While the [labor market] strength might not be what the Federal Reserve wants, it’s great news for investors because there continues to be no sign of a slowing economy – let alone a recession – in the labor market data. That means there’s no impending slowdown to hit corporate earnings and drag down stock prices, and it’s helping to send cyclical sectors higher…”
Surprise. Investors don’t expect the Federal Reserve to increase rates in June, despite strength in the labor market. That may be because the employment report also offered hints that the economy may be softening. For instance, the unemployment rate rose to 3.7 percent as unemployment among women and Black Americans increased. In addition, the average length of the work week shortened slightly, and the pace of average hourly wage increases slowed.
Last week, major U.S. stock indices gained, according to Barron’s. Yields on U.S. Treasuries with maturities of one-year or longer finished the week lower as policymakers voted to raise the debt ceiling.