February 17, 2024 | AI Outlook, Investing in Technology, CPI, PPI and Health Insurance Before Medicare

AI Outlook So Far

Microsoft spent about $7 million per 30 second ad for the Super Bowl promoting their Copilot AI service. Some results are not coming in so good for Copilot with some testers after using the software for more than six months said it was useful but doesn’t live up to its price. Another survey adopter said the initial excitement wears off with a 20% drop in use after only a month. Executives at Microsoft expected billions of dollars in new revenue as their search engine Bing would take market share from Google. Unfortunately, nearly a year later Bing has only seen less than a one percent gain in market share. A survey from Boston consulting group said that roughly 90% of business executives said generative AI is a priority for the company this year; however, 66% said it would take a couple years for the technology to move beyond the hype. 70% of those executives said they were only going to do small investments with limited testing. I’ve been concerned about the over hype of the money going into AI and the return on investment taking years to payoff. This would not be the first time on Wall Street that the hype sent stocks into orbit, only to come back down to earth when reality set in.

Investing in Technology

More strange news with the markets. As of the week ending February 9th, the NASDAQ was up 6.5% this year and the S&P 500, which is also heavily weighted in tech companies had increased 5.4% in 2024. This compares to a return of just 0.84% for the broader Russell 2000 index. The S&P 500 has increased 14 of the last 15 weeks something we have not seen since the end of 1972. I’m not saying the market is going to crash tomorrow, but the 73/74 market period had a very long bear market. The difference here is that our market is so concentrated in technology that I think we could see a bear market, but many companies will still gain going forward because of the great value that has been ignored. Another example of exuberance in technology would be that fact that since the 2008 financial crisis, US companies with dividends above 5% gave investors a return of 450%. Over that same timeframe, companies that don’t pay a dividend have returned nearly 1200%. Going back to the 1870s, this flies in the face of normal behavior. The excitement in tech has led to some major gains for the big tech companies and Microsoft is now the most valuable company with a market cap around $3.1 trillion. It is almost twice the $1.6 trillion value of the entire S&P 500 energy sector, yet it’s annual free cash flow of around $67 billion is less than half the $135 billion from these energy companies. I do not know what will cause a drop or when it will happen, I just believe many investors do not realize the risk that they are taking by investing heavily into technology. Unfortunately, all parties do come to an end.

CPI

The Consumer Price Index (CPI) caused a lot of concern and sent stocks lower as the reading came in above expectations. Frankly, looking through the data I don’t think the numbers were that bad. CPI rose 3.1% compared to last year which was above expectations of 2.9%, but was lower than the reading of 3.4% in December. Core CPI, which excludes food and energy rose 3.9% and came in above the expectation of 3.7%. This reading matched December’s 3.9% rise which was the smallest increase since May 2021. It is important to remember that numbers don’t always go in a straight line and I believe this report should not have a major impact on the Fed’s rate decisions. Especially, when looking deeper at the numbers. The shelter index again continued to be a heavyweight on the report as it climbed 6% compared to last year. This increase accounted for over two thirds of the 12-month increase in core CPI. It was also interesting that there was a little bit of a divergence between the rent of a primary residence which was up 0.4% in the month compared to the owners’ equivalent rent of residences which was up 0.6% in the month. I believe this is a silly metric that distorts the CPI level. The Owners’ equivalent rent is obtained through surveys and asks members of a household: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?" I don’t believe this is a great way for tracking shelter inflation and that these numbers should be taken with a grain of salt. Other areas of the report continued to see positive deceleration or even deflation in some cases. The energy index was down 4.6% compared to last year with gasoline falling 6.4%. Food at home showed a gain of just 1.2%, which compares to a peak of 13.5% in August 2022. Food away from home did have a larger increase of 5.1%, which likely stems from higher wages and the elevated demand we are seeing at restaurants and bars. Overall, as I said I don’t think this was a bad report, but investors need to realize that the Fed will not be cutting rates 6 ti