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July 1, 2023 Market Update

This past Friday was the last trading day of the first half of 2023, and what a first half of the year it was for stocks.  As the table below indicates, all of the equity indexes posted positive returns, with the Nasdaq rising by 31.73%, for its best start of the year since the 1980’s. 

There are a number of reasons for the strong start to the year, including 2022’s selloff, which meant stocks were essentially on sale at the start of the year.  Another was the incredible returns provided by a small number of the biggest technology stocks, as discussed below.  Without their massive gains, the market’s returns would be much more modest.

The question now becomes, will the good times roll into the second half of the year?  That’s a tough question to answer, but one thing is for sure – stocks are more expensive today than they were back on January 1st.  So, I’m not expecting the second half of the year to be a repeat of the first. 

Artificial intelligence has taken Wall Street by storm since the launch of OpenAI’s ChatGPT in November last year.  Since then, companies who appear to be well-positioned to capitalize on AI’s growth have seen their stock prices soar. 

For example, shares in Nvidia (NVDA), the leading maker of AI chips, have vaulted 190% in 2023 so far this year.  Other beneficiaries of AI’s promise include Microsoft (+43%), Google (+36%), and Adobe (+45%), to name just a few.

Mr. Market is banking on artificial intelligence enabling businesses to improve their products or gain a strategic edge, and thereby boost corporate earnings.  Goldman Sachs estimates that AI adoption could boost productivity growth by 1.5% per year over a ten-year period.

But the magnitude and timing of those gains are uncertain, and capitalizing on those gains will require expensive investments in computing power and network bandwidth.  Furthermore, increases in productivity haven’t always led to higher stock prices, and rising interest rates could offset much of AI’s productivity gains.  

The burst of the dot-com bubble shows how badly things can turn out when investors’ expectations aren’t matched by reality.  As analysts at Goldman Sachs recently wrote: “Stocks with high perceived growth potential are rewarded with high valuations, but investors flee and the [stock price] multiple collapses at the slightest sign that the growth rate may not be sustainable.” 

So, notwithstanding AI’s potential, going all-in on AI stocks is a risky proposition.  History has shown that a diversified portfolio is likely to be a better investment over the long term.

On another note, if you are a client of The Milwaukee Company, you will be receiving your second quarter review and third quarter outlook soon.  I would welcome an opportunity at your convenience to discuss it with you by phone, video conference, or in person.

That’s all for now.  Please be advised that there will not a market update next week.  Happy 4th of July, and invest wisely my friends.