First quarter of 2023 is over and it was quite an interesting one with so many unexpected events...almost similar to first quarters of past few years...Markets don't like unpexcted events - so it was surprising that with so many expected events, markets did pretty well especially Nasdaq with double digit gains. What's in store for rest of 2023...for that let's look at some ABC...factors!
AI: ChatGPT and followup GPT-4 captured the imagination of world in just few months and revived the excitement around AI similar to what Netscape did for Internet and iPhone did for mobile. Those two events marked the pivotal moments and changed the world and lives of billions of people forever. It's still too early for AI to decide if this is indeed such moment...we will know that in next decade or two. But for now there is definitely lots of excitement with every company jumping onto the bandwagon of AI to project that they are not left behind...Companies which would benefit from this are:
- "ARMs" dealers - companies which provide components to power AI. Biggest winners would be semiconductor companies like NVDA, AMD and to smaller extent INTC, QCOM and ARM (no pun intended)
- Companies which would create useful (to millions of customers) applications using AI. Think about how bookings.com used internet to change travel industry. The winners are not obvious but VC money would flow into these to create next real companies.
- Big tech companies like Microsoft, Google, Apple, META which would integrate AI in all their offerings and charge fees for APIs/Usage similar to what Apple/Google did with 30% cut for revenue from mobile apps
Banking: My last blog covered some aspects of this...this was kind of "mini" black-swan event and threatened to repeat 2008 March events. Luckily US and Swiss policymakers moved quickly and stopped the potential contagion. But going by most respected banker JP Dimon's long shareholder letter, it's not over yet. Many banks (small and big) are sitting on hundreds of billions of paper losses on their balance sheets due to aggressive moves in interest rates...If they have to sell these assets in 2023 (if there are stupid bank runs like at SVB), it could wipe out equity of many banks. The "implicit" guarantee signals Yellen/Binden and Powell have sent have calmed down the run on deposits. But the events have awakened passive holders of cash and they have started taking steps to move the money where they can get 4% (instead of 0.4% in banks). That's double whammy for banks profits. Next two weeks of earnings would tell us the real story on banking sector going forward...so watch out. This could be like 2008 if skeletons start coming out or like 2009 where stock prices were so depressed that it provided once in generation opportunity.
Cloud/Capex: Move to cloud has been driving the spending on IT for last decade producing cloud giants which would be Fortune 50 companies on their own. The trend is gaining momentum due to various factors even though there may be bumps along the way. Companies preferring one time large Capex outlays to periodic Opex model is changing the dynamics of enterprise and consumer spending. Cloud providers are also heavy Capex spenders to build the capacity...But 2023 is "Year of Efficiency" and hence we could see slowdown in Capex spend by these companies impacting growth of suppliers to cloud companies.
Data/Debt: AI is only as effective as data it's built on.We have heard the cliches like "Data is the new Oil" and to some extent I do agree with it. So companies which "own" the data and able to create useful insights from the data or monetize access to the data are going to be winners. That's why SNOW, DDOG are still trading at 20-40 times revenue.
American government is the biggest debt holder in world and if congress does not act soon to increase the debt-limit, it could create situation similar to debt-limit crisis in 2011 summer...but congress always act when it comes down to wire after lots of drama and grand-standing. Consumer seems to be in much better shape when it comes to household debt as compared to 2008-09. But with clouds of recession and high interest rates, consumer may hold back adding more debt which itself may lead to soft recession (consumer drives 2/3rd of US economy)
Economy: If you believed pundits and economists, economy should have been in recession already. But looking at March employment report - unemployment continues to be lowest in last 50+ years, economy seems to be doing just fine despite all the crisis. So is Economy heading into recession, hard-landing, soft-landing or gaining momentum? No one knows for sure...even experts at Fed or various economic think-tanks have no idea. So when it comes to predictions on economy, don't believe any tweets, news or blogs like mine. Trust your own gut-feeling and how your own economic situation is - income, expenses and debt. That's the best indicator you would have when it comes to where economy is heading.
Fed Policy: Federal reserve's campaign of rate hikes are about to end. They would do 1-2 25 basis point rate hikes in May and Summer and then hold the rates at that level thru Fall'23 and may consider small rate cuts towards end of year. Markets are already expecting rate cuts in summer and may be disappointed. It would all depend on GDP growth and data on Inflation. All economic reports would be scrutinized by markets and Fed. Bond markets and Fed are having interesting dance moves...10 year and 2 year treasury yields are suggesting that cuts are imminent while Fed officials are saying....not so soon. Let's see who blinks first.
I could go on but it's becoming little long read. So let's wrap up. What all these ABC...mean for 2023 and normal investors? That's where we take help from another cliche "History rhymes...". Here are some historical anecdotes
- Markets are up 80-90% of times 6 month and 12 month after interest rate pause with double digit gains (https://monetagroup.com/blog/the-other-side-of-the-pause-market-returns-when-the-fed-stops-hiking/)
- Year 3 of presidential cycle of first term has been best year (compared to rest of years). Guess what - 2023 is 3rd year of Biden presidency. (https://apnews.com/article/business-b55b1efd70e3d3a2e8ebf48111850f0e)
- And if you believe in sports and markets superstition, when Chiefs won Super Bowl (1970, 2020 and 2023) or Uconn won NCAA championship (1999, 2004, 2011, 2014, 2023), markets have always been up (except one year when markets were flat)
Have a great Easter Weekend!
/Shyam
Comments