January 21, 2024
Three weeks into 2024 and many of us are back into familiar patterns of work, school and life as a whole. The first few days of a new calendar year are often a little cloudy in our minds. Something feels different even as everything is exactly the same. But then vacations end, the kids are back in school, and the last forlorn Christmas trees find their way onto the city sidewalks to be spirited away to parts unknown. We pick up where we left off but still hope to start something new.
In the investing world, the start of one calendar year does offer a significant break from the prior one. Not only does a new year mean a new chance to keep score regarding investment returns, but the tax ramifications typically lead one to put off taking taxable gains until after January 1st so as to forestall taxes due for another fifteen months. Many people get cash gifts and bonuses that need to be saved in one way or another. Our financial lives start a new year with a necessary tallying of the upcoming year's expected income vs. expenses.
Finally, January is a time to take note of the trends that affected us in the prior year --economic, cultural, political-- and determine how and why different forces will make themselves felt in the new year.
By the third week in January, after marveling at how fast the time goes, and looking at December statements, and preparing some type of budget (in our minds if not on paper), we are ready to start the new, New Year, the one that really counts and will take up the better part of the next eleven and a half months.
The first week or two of 2024 unfolded as expected. Most of 2023's biggest winners, particularly the seven tech stocks denoted as "The Magnificent 7", moved down somewhat as people booked profits, and interest rates moved up as investors reexamined whether the Federal Reserve would really unleash a torrent of rate cuts in the first half of 2024 even though the Fed hiked rates sharply for almost two years to curb inflation, which is still above the 2% target.
Then, in the third week of the year, tech stocks once again moved up sharply, with semiconductor stocks like Nvidia (NVDA), and AI-centered companies such as Microsoft (MSFT) heading to all-time highs. Even Apple (AAPL), which was downgraded in the first few days of the year by a couple of publicity seeking "analysts", rebounded when it was upgraded by a different stock analyst (once again reminding us to never allow these analyst reports to dictate long-term investing decisions). All of this suddenly led the broader stock market averages, including the S&P 500, to finally move above their own all-time record highs set more than two years ago. It's early, but 2024 has been a mix of the old and the new, with tech stocks, particularly the AI-focused, once again driving somewhat narrow gains, as in 2023, although now with the largest stock market indices at their highest levels ever. These record highs should not be seen as a cap to further gains, however, as the stock market, representing leading companies in the most advanced economy in the world, should go up over time as revenue and earnings march higher along with population, technological progress and productivity.
So we have had the reaction to 2023, and now the reemergence of many of 2023's trends, including the volatility of interest rates. It is time for the year to really start. What will this year bring?
For one, the influence of Artificial Intelligence on business is something that will only accelerate. Yes, it is a mixture of hype and reality. But the ability of AI to allow individuals, businesses and governments to feed every relevant past data point into a computer and come out with a product that incorporates and synthesizes that information quickly and comprehensively cannot be overstated in importance. First, it is the vendors of AI as a product, the chip makers and software sellers, that will prosper. But the next order of beneficiaries will be those companies that can employ AI to make their own businesses more profitable. The AI world, which burst into view (and the hype cycle) in late 2022, is not going away as an investment theme and creator of wealth, in 2024 and beyond.
But what of the non-AI world? Technology here is still dominant, as we continue to live much of our lives in front of a screen, in our work lives, to be sure, but also culturally, politically and for entertainment. Yet, the companies that provide much of the content for the streaming, online world are struggling, such as Disney (DIS) or Warner Brothers Discovery (WBD). At the same time, the businesses which allow consumers to largely create their own content, like Meta (META) and Google's YouTube (GOOG) are thriving, just as Amazon (AMZN) continues to dominate the world of online commerce as well as cloud computing.
Despite the omnipresence of technology, life is still, in large part, lived "IRL", in real life. Remember buildings and how to build them? What about transportation and healthcare, travel and leisure, farming and manufacturing? As we think about the future, we not only can't forget the past but need to recognize that we are still living in the world that the past has created. What that means for investors is businesses serving the everyday needs of consumers' non-digital lives will continue to be part of a successful investor's diversified portfolio, especially when those companies are cheap on a relative and absolute basis compared to the tech behemoths. Indeed, the success of well-run, non-tech businesses should accelerate as the US economy finally departs the post-financial crisis and post-COVID world of artificially low interest rates and a feast or famine cycle for "stay at home" products vs. out-in-the-world products and services.
At Arrival Capital, we never want to embrace an investment philosophy based solely on a "return to normal" or a "post-crisis" world, because in business, as in life, there is always something that can go wrong, or right. The antidote to "there's always something" is careful, value-based investing, and creating a diversified portfolio of some of the most exciting, profitable companies in the world, along with some of the most important, and profitable, least exciting companies in the world. At Arrival, we will help you invest in the world as it is and as we think it is going to be, and help you navigate to a more secure financial future. Contact us today for more information and Happy new, New Year!