Lexicon Financial Group Weekly Update — June 19, 2024
“The beauty of diversification is it’s about as close as you can get to a free lunch in investing.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Wayne and I both like movies. Not always the same kind, but we’ve both seen our fair share of movies that feature the dark side of technology. Who can forget the sentient computer HAL in 2001: A Space Odyssey? Or The Matrix and Terminator movies, with their seemingly infinite sequels.
Science fiction writers like to stretch and bend the laws of physics to fit their narrative. Until their fiction becomes reality. Remember how eerily similar the Star Trek communicator was to early flip phones? What we think of as fantastical today might just become common place tomorrow. That’s the current landscape when it comes to AI or “artificial intelligence.” What is fad or novelty today is quickly becoming enshrined in all aspects of our lives, from health care to business to arts and communication.
And that’s why on Tuesday, Nvidia, with a market capitalization of $3.33 trillion, became the world’s most valuable public company. It is estimated that Nvidia controls between 70 and 95 per cent of the artificial intelligence (AI) chip market. Nvidia began 2024 with a $1.2 trillion market value, less than half of Microsoft and Apple’s market cap at the time. So, passing these two technology giants in overall market capitalization is an impressive feat. The market believes that its chips and processing units are the best game in town, and everyone wants to play. In fact, according to Bloomberg supply chain data, Microsoft makes up 15 per cent of Nvidia’s annual revenue. (1)
For some years now, the technology sector (which encompasses many companies involved in areas such as software, hardware, electronics, internet services, artificial intelligence (AI) and quantum computing) has seen significant growth. The COVID-19 pandemic helped accelerate digital transformation across the globe and made technology even more integral to our personal and professional lives. The emerging increasing utilization of AI is seen by many as revolutionary and the driver of the next wave of growth and innovation in the sector. (2)
We’ve written about the rise and fall of technology stocks before. They were among the hardest hit in 2022 when the markets were down over 20 per cent. But the recovery has been magnificent, spurred on by what people are calling “The Magnificent Seven”: Nvidia, Microsoft, Apple, Amazon, Google, Meta, and Tesla. According to data from S&P Global Indices, the Mag 7 stocks were responsible for about 37 per cent of the S&P 500 Index’s (S&P 500) 10.2 per cent gain in the first quarter of 2024 and roughly two-thirds of the S&P 500's advance in 2023. (3)
However, individually, not all Mag 7 stocks have done as well in Q2 2024. As of the end of May, Tesla was down 28 per cent which made it one of the S&P 500’s worst-performing stocks, and Apple was flat. Just when you think it is getting easier to pick a winner… it isn’t. Which is why we continue to rely on using low-cost exchange traded funds to gain access to sectors of the economy like technology. We spread out investment risk by not focusing on one or two technology stocks and hoping we are right. We invest in an index that purchases all of them. It’s a more institutional, more conservative, and more prudent approach to investing in what is still a highly volatile sector.
It’s easy to cheer on large gains when they are occurring, but a short 18 months ago, technology investors were staring at large double-digit losses down and wondering if the sun would ever rise again on the sector. Of course, no one knows what the rest of 2024 will bring for these stocks. Our client portfolios – especially those with a higher appetite for risk – continue to be exposed to the technology sector, but always as part of a more broadly-diversified portfolio.
For people who don’t think they are invested in technology, well… think again. Even the benchmark S&P 500 is weighted based on market capitalization. This means that the largest companies comprise the largest portion of the index. The exact concentration changes frequently as the market value of companies fluctuate, but the “Mag 7” made up 31.5 per cent of the S&P 500 as of June 7. In the tech-heavy Nasdaq 100, the Mag 7 accounted for 42.3 per cent of the index, as of June 6. Doug Cohen, Managing Director, portfolio management at Fiduciary Trust International, views the key risk of investing in the Mag 7 stocks as being overly reliant on mega-cap stocks that are sensitive to broad economic conditions and uncertainty around the future AI. He, and others, believe that the current AI euphoria is similar to the 2000 internet boom/bust. If the practical AI applications don’t meet the initial hype or regulation stymies its growth, the momentum could potentially fade. (4) And let’s not talk about the mania that was NFTs only a few years ago.
So what’s the dark side of technology? Volatility? Innovation and change? 2022 was a tumultuous year as war broke out between Russia and Ukraine, oil prices and inflation soared, wages remained low and interest rates rose while many feared the beginning of a recession. (5)
But it was tech stocks that fell more than 30 per cent, more than the overall market drop of 20 per cent. The Dow Jones U.S. Technology Index, an index tracking major tech companies, down more than 35 per cent while the NASDAQ was down over 33 per cent.
So, we diversify by allocating assets across a variety of asset classes. Bonds, stocks, and cash. The specific asset allocation that works best for you might not be ideal for another, which is why each client portfolio is customized and somewhat unique. What isn’t unique is our view that diversification matters. Costs matter. Research matters.
There is no doubt we’re at a crossroads when it comes to our use of AI and investing. We’re not predicting the rise of sentient machines anytime soon, but for the time being we think the human touch is important, especially when it comes to helping clients navigate the new economy.
Looking Back
Inflation cooled down slightly in the United States (U.S.) last month just as consumer frustration over higher prices continued to become a larger shadow of the November presidential elections. The consumer price index (CPI) rose at annual pace of 3.3 per cent in May which is lower than 3.4 per cent in April. Growth in prices has fallen dramatically since surging above 9 per cent two years ago – the highest level in a generation.
The Toronto Stock Exchange’s S&P/TSX composite index (TSE) fell to a three-month low last Friday. It continued its recent underperformance versus U.S. markets as investors shunned the financial and energy shares that have a heavy weighting in the index in favour of technology shares. The TSX is up 3.3 per cent since the start of the year which is well below the 13.9 per cent gain for the S&P 500, which has a higher weighting in high-flying technology shares. (6)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 1.6% | 13.9% |
| Nasdaq Composite | 3.2% | 17.8% |
| Dow Jones Industrial Average | -0.5% | 2.4% |
| S&P/TSX Composite Index | -1.7% | 3.3% |
Source: Associated Press and Morningstar Direct 06/14/2024
Major indexes in the United States (U.S.) ended mostly higher last week with the S&P 500 Index and NASDAQ Composite touching new highs. However, the market’s advance remained exceptionally narrow for the second consecutive week. Enthusiasm over the potential of artificial intelligence appeared to continue to provide a tailwind to technology-related stocks and growth shares, which have outpaced value stocks by the largest margin since March 2023.
Another positive for the outperformance of growth shares was the reassuring inflation data and falling interest rates, which increase the theoretical value of growth companies’ future earnings. A week ago, the Labor Department reported that headline consumer price index (CPI) inflation was flat in May for the first time in nearly two years. Core (less food and energy) prices rose 0.2 per cent, marginally below expectations and a seven-month low. On a year-over-year basis, core inflation fell to 3.4 per cent – its lowest level since April 2021.
Producer price index (PPI) inflation also surprised by defying expectations for a slight increase and falling 0.2 per cent. On a year-over-year basis, core PPI fell back to 2.3 per cent, which marks the end to five consecutive months of increases. Furthermore, import prices fell 0.4 per cent in May which is the first decline in four months.
Inflation fears were further calmed by surprise jumps in weekly and continuing jobless claims. Over the week ended June 8, about 242,000 Americans filed for unemployment which is the most in almost a year. Over the previous week, the number of people who had filed at least two weeks of claims hit 1.82 million, the most since the week ended January 20 and the third-highest number over the past year. The U.S. economy appears to be slowing which is a positive for the reduction of inflation. The downside growth and inflation surprises, however, pushed the yield on the benchmark 10-year U.S. Treasury note sharply lower for the week, from 4.43 per cent to 4.21 per cent. Bond prices and yields, as you know, move in opposite directions.
In local currency terms, the pan-European STOXX Europe 600 Index ended the week on a negative note as it returned -2.39 per cent. This was partly due to political uncertainty which undermined confidence following the strong showing by far-right parties in the European Parliament elections the previous weekend. The rest of the major European markets could not avoid the fallout as Italy’s FTSE MIB fell 5.76 per cent, Germany’s DAX gave up 2.99 per cent, and France’s CAC 40 Index lost 6.23 per cent. The UK’s FTSE 100 Index finished 1.19 per cent lower as well. This comes as no surprise as European markets started last week on an uncertain footing, weighed down by political risk after French President Emmanuel Macron called for snap legislative elections later in June as right-wing and far-right parties achieved major gains in the European Union elections. Meanwhile, European Central Bank President Christine Lagarde confirmed that restrictive monetary policy in Europe has not reached its end and there would not be any further rate cuts any time soon. Naturally, this did not lighten the growing negative mood in Europe.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Asset Bubbles Through History: The 5 Biggest
Portfolio Diversification Explained: Definition, Importance, Strategy
Japanese stock markets ended last week mixed with the Nikkei 225 Index gaining 0.3 per cent and the broader TOPIX Index down 0.3 per cent. The outcome of the Bank of Japan’s (BoJ’s) June meeting was viewed as broadly dovish, lending support to equity markets.
Revised data showed that Japan’s GDP contracted by 1.8 per cent on an annualized basis over the first quarter of the year. This is less than initial estimates of 2.0 per cent, due largely to an upward revision in private inventories. Weakness in the first quarter had stemmed largely from the economic impact of the earthquake that hit Japan’s Noto peninsula in January and the suspension of some auto production. On the inflation front, producer prices increased 2.4 per cent year-on-year in May, exceeding market expectations of a 2.0 per cent rise.
Chinese equities fell in a holiday-shortened week as data revealed that deflationary pressures continue to weigh on the economy. The Shanghai Composite Index declined 0.61 per cent, while the blue chip CSI 300 gave up 0.91 per cent. In Hong Kong, the benchmark Hang Seng Index was down 2.31 per cent. Markets in China were closed Monday for the Dragon Boat Festival.
China’s consumer price index rose a below-expected 0.3 per cent in May from a year earlier and unchanged from April’s increase. Core inflation, which strips out volatile food and energy costs, rose 0.6 per cent, slowing from April’s 0.7 per cent increase. The producer price index fell 1.4 per cent from a year ago, its 20th month of decline, but eased from a 2.5 per cent drop in April. Weak consumer confidence and a protracted property sector slump have kept a lid on prices in China despite numerous measures from Beijing to prop up the economy and markets over the past year.
Data from the Dragon Boat Festival highlighted the consumer caution in China. Tourism revenue over the three-day holiday rose 8.1 per cent from the 2023 break but lagged pre-pandemic levels. Domestic traffic rose 6.3 per cent from last year but average spending per traveler fell 12.3 per cent from 2019. Some analysts predict that the Chinese government will continue rolling out support to stoke demand as weak consumer sentiment remains a drag on the economy. (7)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Nvidia Now World’s Most Valuable Company—Topping Microsoft And Apple, Antonio Pequeno, Forbes, June 18, 2024
Top 5 Sectors To Invest In 2024, Jason Kirsch, Forbes, January 12, 2024
The biggest risk to investing in 'Magnificent 7' stocks like Nvidia and Amazon, according to top CEOs, Brian Sozzi, Yahoo!finance, May 7, 2024
What are the Magnificent 7 stocks? Rocco Pendola, Paul Curcio, David Tony, CNN Underscored Money, June 10, 2024
Why Were Tech Stocks Down In 2022—And How Long Will The Slump Last? Q.ai – Powering a Personal Wealth Management, Forbes, January 19, 2023
The close: TSX extends weekly losing streak as investors chase performance, The Globe and Mail, June 14, 2024
Global Markets Weekly Update, T. Rowe Price, June 14, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
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