“What’s past is prologue”, according to Shakespeare. Contrast that with how past performance isn’t a guarantee of future results, according to our common industry disclosure, and you’d be correct in wondering why we spend so much time talking about history. I mean, are we trusting it as a guide for the future or not? I’ve always liked the middle ground quote from our American Shakespeare, Mark Twain, about how “history doesn’t repeat itself, but it often rhymes”.
I mention this because of the recent two-year anniversary of ChatGPT being unveiled to the public. As we’re all aware, the ensuing AI craze provided a major tailwind for the stock market over the past couple of years, although it’s tapered off a bit lately. AI’s dramatic impact on markets has been compared to the sea change of the internet’s “creation” in the early-90’s that eventually led to a market bubble. That whole process took over a decade to run its course but the last couple of years certainly seems to rhyme with it, at least so far.
I’m reminded of a Far Side comic from some years back. I couldn’t find the image to share with you, but I’m sure you can imagine the scene:
A person sits alone at a bar presumably deep in worry and drink, hoping for just one more bubble before retirement. The thinking, or at least how I interpreted the cartoon, is that a bubble would be obvious the next time and one could simply ride it until almost bursting, sell their stocks, and all their worldly problems would be solved.
While there’s a simple logic to that, part of the irony of the cartoon is how history doesn’t repeat itself exactly, it rhymes, as Twain suggested, and if hitting homeruns every time was that easy everyone would do it. So history is useful and important to help us understand the present but is pretty lousy as a predictive tool because future facts and circumstances will always be different.
Is history doomed to repeat itself due to AI’s impact on markets, making a major market bubble and subsequent burst something preordained? That’s sort of a dark question early in this holiday season but it’s nonetheless something to pay attention to.
All that said, here’s some snippets of information, charts, and context along these lines from my research partners at Bespoke Investment Group…
November 30th marked the 2-year anniversary of the release of ChatGPT, which kicked off the AI Boom. The success of ChatGPT has resulted in a massive ramp-up of capital expenditures in addition to various end-user adoptions like AI copilots, AI image generation, chatbots, humanoids, self-driving cars, and more. Leaving it to the imagination, there are endless applications for AI in modern life so the sky is the limit and it certainly will be looked back on as a notable technological advancement.
With ChatGPT turning two, we've updated our chart comparing the Nasdaq's performance since its release to other major tech releases over the past few decades. These include the first Microsoft MS-DOS operating system in 1981, AOL in 1991, the Netscape web browser in 1994, the iPod in 2001, MySpace in 2003, and the iPhone in 2007.
The Nasdaq is currently up 79% since ChatGPT's release on 11/30/22 (506 trading days ago). That barely edges out the Nasdaq's gain of 73% over the same 2-year time frame following the release of the Netscape web browser in December 1994. As you can see in the chart, these two releases -- ChatGPT and Netscape -- look very similar with bigger gains than any other major tech release since 1980.
Below is a closer look at the Nasdaq's move since ChatGPT's release on 11/30/22 versus its performance following the release of the modern web browser (Netscape) in late 1994. In this chart we've expanded the timeline out to the end of 1999 so you can see just how much more the Nasdaq would go on to rally in the second half of the 1990s. For those arguing that we're still in the early innings of the AI Boom, this chart provides you with some strong ammo! Two years after the release of Netscape, the Dot Com Bubble of the 1990s was still just getting started.
(We would note, though, that if the Netscape comp holds, there would be a pullback in the next 100 trading days or so before the next leg higher occurs.)
I don’t know about you but I’m finding myself to be more of a traditionalist these days. I like my holiday season evenly distributed with each holiday given it’s due. So I balk when Christmas decorations start popping up before Halloween and Thanksgiving sort of floats in between. And when Black Friday and Cyber Monday deals start showing up in my inbox weeks ahead of schedule, it throws me off. If these are early deals, shouldn’t I just wait for even better prices after Thanksgiving? But as with so much these days, all this seems subject to wide interpretation and is mostly about marketing anyway. Gosh, I’m feeling grumpy this morning…
Another traditional part of the holidays is people forecasting how much consumers might spend during the shopping season. This, too, is subject to opinion and perspective but consumers are, on average, expected to spend a record amount as they hit the malls, online retailers, and the nation’s roads and airports. The TSA is predicting a record year for Thanksgiving week travel, for example. Easing inflation has helped, along with a strong wealth effect from increased asset prices.Given that consumer spending has accounted for roughly 80% of GDP growth this year, more spending is a good sign for our economy, even when viewed through the tempered lens below. I’ll again lean on a quick summary and chart from JPMorgan this week that illustrates this point.
Besides that, I’d like to take a moment to wish you and yours a wonderful Thanksgiving. This is one of my favorite holidays. Family and friends come together in gratitude and appreciation for, well, everything. There’s good food and drink, and perhaps discussions stretching beyond politics. Enjoy!
From JPMorgan…
This Thanksgiving, as families gather around the table, the festivities provide a welcome reprieve from the political tensions of recent months. With Americans expected to spend nearly a trillion dollars spreading holiday cheer, this spending showcases their resilience in a shifting economic landscape.
While holiday spending is projected by the National Retail Federation to hit a record high, sales growth, as shown by the chart of the week, is expected to fall slightly below the pre-pandemic average of 3.6%. However, this moderation reflects easing inflation rather than weakening demand. In fact, when adjusted for inflation, real sales are set to exceed last year, buoyed by record shopper turnout and an anticipated rise in per-person spending to around $900. Driving this is real wage growth, which has remained positive for a year and a half. Furthermore, stock market gains and recent Fed rate cuts have lifted consumer confidence. That said, elevated prices, along with the depletion of pandemic era savings cushions, may cap spending growth for some households.
Retailers, for whom the holiday season drives a disproportionate share of annual sales, face a mixed outlook. Deal hunting consumers are turning to discount retailers, boosting revenue and profit forecasts. Conversely, those reliant on discretionary categories like apparel and specialty goods are seeing softer demand as shoppers focus on essentials.
Despite challenges, this season reflects a broader economic trend: slowing but not stalling. As winter sets in, consumer spending is cooling but remains far from frosty—underscoring the resilience of the U.S. economy as we head into 2025.
Last week was a big one for markets. The Fed announced another interest rate decrease, we had some good economic and corporate profit reports, and that other midweek announcement… what was that about again?
All kidding aside, you’re likely aware that the stock market surged on last week’s election news. Republicans were predicted to sweep the White House, the Senate, and the House (the latter now confirmed as I type this Tuesday morning). Very generally speaking, the stock market favors less regulation, lower taxes, and business-friendly legislation, all of which are expected when Republicans control the government. Will the market get what it wants? Perhaps, but last week and for the time being it’s all about shifting expectations.
That said, one of my professional tenets is not to lapse into politics. I don’t have anything to add other than personal opinions and I’m sure you’ve had your fill of those from elsewhere in recent days and weeks anyway. This isn’t to suggest that politics is unimportant, far from it. Instead, I prefer to deal with the practical implications of our politics, how it impacts markets, the economy, and so forth. So let’s look at some of the market reaction last week and some context as we move forward.
The stock market had been heading south a bit prior to the election but nothing major. Then the generally unexpected results (if you went by the major polls) came in late Tuesday and Wednesday saw an increase of 2.5% for the S&P 500, over 3% on the Dow, and the NASDAQ also surged higher. The S&P 500’s 50-day moving average price swung from “neutral” to “extremely overbought” in one day. For the week the S&P gained about 4.5%.
The relief rally, as described by the WSJ, impacted some parts of the market more than others. Small cap stocks had a one-day gain of nearly 6%. For the week, Tech and Financials were up over 5%, and Consumer Discretionary stocks were up 9% as investors “waved bye-bye to Bidenomics”. Bringing down the average were Real Estate, Healthcare, and Consumer Staples sectors, which each grew by maybe 2% or less. Utilities actually declined a couple percent last week. And in the realm of purely speculative assets, Bitcoin shot up and is over $86,000 as I type, based largely on assumptions the new administration will reduce regulation on cryptocurrencies.
Bonds initially fell as stocks rose but held up through week’s end. Yields on Treasury benchmarks were volatile but the 10yr Treasury yield settled around 4.3%, for example. Performance-wise, short-term bonds were flat to up a little, while medium-term bond index funds like the iShares U.S. Aggregate and Vanguard Total Bond Market were up around 0.8% for the week. Long-term bonds performed better but that’s after getting beat up during the few weeks prior. Elsewhere in fixed income, preferred stocks rose over 2% as their hybrid nature fed on optimism about stocks.
Helping fuel market performance last week was another rate reduction from the Fed. This marks 0.75% off the top of short-term rates since September. The pace of rate reductions is now expected to slow with about a 65% chance of another quarter point reduction when the Fed meets again in December. The bias is till toward reducing rates into the new year, especially since Fed Chair Jerome Powell mentioned during his press conference last week that rates are still high enough to restrict growth. But I think he, like many Americans and market participants in general, were surprised by the election results and are in recalibration-mode in terms of what policies to expect and how that changes the economic outlook. For example, the CME’s FedWatch tool currently shows investors expecting around another half percent rate reduction by Spring, versus over twice that prior to Election Day.
Along these economic lines, here’s a chart that I received yesterday from JPMorgan that speaks for itself.
As I type, markets have begun the new week with continued optimism. Will it last? Only time will tell. The jury is still out on the question of which party is better for markets. Frankly, there are too many variables and too much of a time lag to legislative changes to come up with an unbiased answer anyway. However, like I already mentioned, investors (collectively) favor the idea of Republican control, at least at the outset, and we can easily see how the market’s pulse quickened since last Wednesday.
So let’s be pragmatic and take what the political environment and markets throw at us in stride. Expect volatility while expecting long-term growth. Beyond that, if I’m managing your portfolio please know that I intend to stick with the plan. As values continue to rise in some parts of your portfolio, we’ll rebalance. Should any part of your portfolio need updating or replacing, I’ll handle it. If something has fundamentally changed in your financial life, such as your work situation or major unexpected expenses popping up, please let me know.
Good morning everyone. I hope you had an enjoyable Thanksgiving last week. For me, it was a good time to add some calories that I’d soon be burning off.
While I won’t bore you with all the details, I spent most of this past weekend paddling a stand-up paddleboard in 3.3-mile loops within a water park in Sarasota FL. The race is called Last Paddler Standing. Sounds fun, right?
The main event went up to 48 hours of continuous one-hour loops. A “super loop” of about 4.9 miles kicked in at lap 49 – more on that in a minute.
Finish each loop however fast you want but the next one starts at the top of the next hour and if you miss it you’re out. You could drink while paddling but eating or otherwise taking care of yourself all had to be done between loops.
This sort of thing exists in the running world and is often referred to as a “backyard ultra”, but to my knowledge it’s unique in paddling. Races like this draw experienced pros and weekend-warriors like me – it’s a good mix.
Each loop began at the top of the hour and took most paddlers about 45-50 minutes to complete. This often left me with 15 minutes during the early loops but more like 10-12 as the loops wore on. Sleep? Forget about it. It’s amazing how much you can do to reset yourself in a few minutes but it really takes a toll on your body and mind as the hours roll on.
I ended up completing 31 laps, top six if I recall correctly. This meant 31 hours of paddling a long rectangular loop while a cold north wind blew the entire time, sometimes with a vengeance. You’d ride the wind down but struggle against it most of the way back. It was so strong at times that it just seemed ridiculous. There’s nothing quite like being cold, wet, and windblown – definitely not what a California Boy expects to find in Florida.
Anyway, my 31 laps were eclipsed by the remaining five paddlers who each went the full 48, as I recall.
Then the super loop kicked in with its added distance, but into that same north wind. Yikes. Incredibly strong/professional paddlers attempted it and failed to finish in the allotted hour.
Still, two managed to finish the first super loop. Just prior to beginning the second super loop, one backed out, leaving the remaining paddler to complete one loop on his own within the allotted time to win the race.
Imagine this… you’ve just paddled for 49 hours in challenging conditions with hydration and food when possible, but no meaningful rest. Then you’ve got to do it one more time, alone, and with weather conditions that were only getting worse. You paddle your brains out and end up finishing about 30 seconds too late. Congratulations on your accomplishment but no, you didn’t “win” the race, the course won. Still, the guy absolutely crushed it and it was one of those inspiring moments that you don’t see very often, even though he didn’t make it in time.
While the final race result was a heartbreaker, my experience was good. I had a few trips down into the pain cave but my wife and kids (my crew), and comradery with friends helped me keep going. Additionally, the other racers, their crews, and the race staff all came together in rough weather to create something special. I plan to sign up for it again but I sincerely hope for better weather next time. Optimism… it gets me into trouble sometimes.
In last week’s note I mentioned how many, if not most, investors are in wait-and-see mode when it comes to the new administration’s impact on the economy and markets. I also mentioned how investors generally favor traditional Republican ideals of lower taxes and less regulation. That said, nobody likes uncertainty.
Along these lines, the following is a great summary from JPMorgan on the ongoing reassessment happening in the markets. We’ve discussed this in recent weeks, but it’s helpful to get some confirmation. Investors had been expecting interest rates to drop rapidly but are now revising those assumptions. This impacts bond prices directly and feeds into stock prices, while also percolating throughout the economy. Rates remaining higher for longer would be a net-negative for the economy and would hit homebuyers and people with consumer debt hardest. The WSJ reports that the average 30yr fixed rate mortgage is about 7.4%, higher than referenced below. And the Prime rate, impacting credit card balances for example, is still at 7.75%, not terrible but substantially higher than a few years ago.
From JPMorgan…
In September, the Fed kicked off its cutting cycle because “the balance of risks” had shifted. But subsequent economic data and the election results could be shifting it back. This week’s chart shows both growth and the labor market are tracking stronger than the Fed expected, posing upside risk to inflation.
Core PCE [personal consumption expenditures] has come down since 2022, but progress has stalled over the past few months. Both CPI and PPI rose solidly this month, increasing estimates for October PCE. Moreover, the housing inflation driving CPI is unlikely to alleviate anytime soon. The ~75bp sell-off in the U.S. 10-year since the first cut has pushed mortgage rates from 6.1% to 6.8%, and housing purchase activity remains near its lowest level since 1995.
While [Fed Chair] Powell stated at the November meeting “in the near term, the election will have no effects on our policy decisions,” investors are likely more concerned about the long term. Several of Trump’s top priorities are somewhat inflationary. Immigration restrictions could re-heat the labor market, stoking wage growth, and tariffs could increase prices. This, combined with a potential trade-war supply chain disruption, could reverse recent disinflation progress in goods.
Altogether, risk seems more skewed toward inflation than in September. December revisions to the dot plot [where Fed policymakers chart their economic assumptions] should reflect this, but the Fed will likely stay the cutting course. However, markets are currently only pricing ~70bps of easing by the end of 2025, compared to ~95bps before the election and ~160bps after the September meeting. Investors should be aware future easing could progress slower and end quicker than previously expected.
Elsewhere in the realm of uncertainty, investors are waiting to learn who President-Elect Trump will nominate to be Treasury Secretary. As you can imagine, this cabinet position can have significant impacts on markets, for better or worse, and is probably the most relevant pick for investors to watch. The position is up in the air as I type this morning. The primary concern among market watchers is how willing a new Sec Tres will be to leverage tariffs. As alluded to above, trade wars, spats, and so forth slow trade in an interconnected global economy, so add that to the list of things for investors to worry about.
Ultimately, these unanswered questions stoke short-term volatility as we swing from unbridled optimism to something more guarded. This may be with us for a while as the new administration gets sorted. Remember, though, that markets can seem shaky even as prices are rising. Some have historically referred to this as climbing the wall of worry, while the WSJ over the weekend referred to investors betting on a market melt-up. However you frame it, investors are cautiously optimistic at a minimum and that’s a good thing.
Well, here we go again. This election marks the 60th time we’ve voted for a president since our nation’s founding. Polls via www.realclearpolling.com/latest-polls and the betting odds sight www.electionbettingodds.com have been all over the place but generally indicate a tight race. We won’t know until we know but if what’s past is prologue, this could be a long day.
In the markets, as I type the S&P 500 is set to open up a bit after a couple weeks of generally being down. The index is sitting right in the middle of its overbought/oversold range so, like the rest of us, the markets are in wait-and-see mode.
Even though it’s less convenient, I like going to the polling place and voting in person on Election Day. We used to bring our kids and today we’ll take our son, now 18, to vote in his first General Election. There’s something about feeling that thrum of history even though it may seem a little antiquated these days.
Apparently a growing number of us prefer to vote early or via mail since nearly half of all the votes cast in the 2020 general election, for example, are in the books already this cycle. Regardless of how you voted, every vote matters and I still believe it’s a powerful thing.
I’ll be back next week with some information about how the markets did or didn’t respond to the election results. Otherwise, enjoy the day as we take another step in our Nation’s history.
