After a challenging 2022, equity markets have been both positive and resilient following the most inflationary economic period in decades. As investors have digested conflicting economic information, markets have moved two steps forward and one step back since the recent lows in the Fall of 2022. The increase in inflation that contributed most significantly to equity market weakness last year has slowly been moderating. This, coupled with stronger than expected corporate earnings and the expectations that interest rates are nearing the end of their tightening cycle, have contributed to this year’s optimism.
At the start of the 2023, enthusiasm for artificial intelligence helped technology stocks regain their footing with the biggest gains coming from a select group of “mega” stocks that you own, such as Apple, Alphabet and Adobe. The adoption of artificial intelligence as a means of improving productivity is not a new concept and many of the businesses in your portfolio such as banks and consumer companies have been employing these tools over the last number of years to streamline operations.
Over the last three decades, we have seen a handful of seismic shifts in the technology landscape: internet, smartphones, search, e-commerce. We believe that Artificial Intelligence (AI) will be one of those seismic shifts that will reshape productivity and economic growth in the coming years. Portfolio companies such as Alphabet (GOOG) are currently well positioned to leverage their dominance in search and access to data during this shift. While we believe that AI will prove to provide a long-term productivity boost to the economy, we are reminded of what Bill Gates wrote in 1996, “we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”
To reduce risk, we actively rebalance positions in your portfolio to keep them in line with your strategic targets. The positive move in technology stocks this year, allowed us to take profits in your portfolio throughout the summer. Looking into the future, we will review each company held to determine if it’s management team is able to leverage new technologies relative to its peers.
Most recently, there have been encouraging signs of broadening market strength outside of technology companies. Other sectors and groups of stocks are appreciating in price. Second quarter earnings were stronger than anticipated and are expected to continue to rise further into 2024. That said, we are purposefully holding a high level of cash in your portfolio, available to deploy as buying opportunities become more evident in the months ahead. While the economy transitions through a hugely inflationary period and higher interest rates remain a factor to consumer spending, volatility is to be expected.
We will continue to monitor for opportunities and adjust for risks along the way.