History Repeating Itself?

“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.)

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