June 24th, 2024
What a long, strange trip it’s been. If you are an AI stock, it has been a great ride and while it feels as if the momentum is slowing a bit, there is something to be said for a period of consolidation and perhaps reflection on how far we have come and where we might be in that journey. If you are not an AI stock, the road has not been as smooth or as even, and any bumps may have been magnified along the way.
A reasonably good set of inflation data after some very strong labor data (at least on the surface) may give some room for the Federal Reserve to move rates lower over the summer or in the fall, depending on corroborating data that inflation is slowing. The strong labor report seemed to take a July cut off the table, but some contradiction between different surveys may mean a less robust labor market than originally thought, and the better inflation data and slower retail sales may put an “adjustment cut” back on the table.
The enthusiasm for the AI story remains and has broadened out a bit to other adjacent technology stocks that are not the one semiconductor company to rule them all (NVDA). The balance of the market is having a little more trouble on the march ever upward as the consumer seems to finally be pulling back a bit and questions about global growth and political turmoil have investors more cautious.
The summer is here and that may be reason to let some of the dust settle after some phenomenal moves in the tech sector while the balance of the market has been left behind. Some rumblings in consumer confidence numbers and retail sales could suggest a consumer that has finally run out of Moxy (or Covid savings) long after they had been expected to.
Political rumblings in Europe and the UK are also confounding economists’ ability to keep up with the potential changes and how that will affect the various economies, and China continues to see problems in property markets. All of which has dampened some of the enthusiasm investors had for those areas and may have a deleterious effect on global economic growth. The situation in the Middle East and Ukraine is also a cause of disruption and continues to be a tragic humanitarian problem with no end in sight.
The capex cycle set off by the burgeoning AI boom seems both quite strong and quite sustainable as most of the buyers of the backbone of AI are the large technology companies that have plenty of cash to fund their investments. The question of use case seems less clear, although as with most technologies in their early stages, the current expectations are likely to be eclipsed by applications that have not yet been identified.
Can the tech capex boom carry along the rest of the market in 2024 and into 2025? That remains to be seen. The US will also have a presidential election this year and while its oft discussed, the ramifications are not yet clear for markets on either side. The government spending issues both in the US and globally have put governments in a different position than they were a few years ago, and while there has been no spending discipline to speak of in the US or abroad, one has to think some curtailments may be coming at some point in the not too far distant future, even if it is started by the oft discussed but rarely sighted bond vigilantes of years past.
We see the US spending boom on AI continuing, perhaps to the detriment of other technology spending. Whether it can continue to drive equity markets will be the question, and the blistering pace thus far this year seems difficult to sustain. As we get into Q2 reporting season we shall see where the tide is still rising and where it may be headed out to sea.
The views expressed are those of the Alpine Saxon Woods, LLC management team as of the date indicated, and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
