Bond market at odds with the Fed
This week we heard from several Federal Reserve (Fed) officials, with most reaffirming their guidance for a terminal federal funds rate at or above 5% (currently at 4.25-4.5%) and keeping them there for the foreseeable future. During 2022, we witnessed the steepest increase in interest rates in history, with the Fed intent on driving down inflation by weakening the economy. While inflation in the US has shown definitive signs of slowing, the Fed seems intent on continuing to raise interest rates. This reminds us of how the Fed stuck with the “transitory” narrative with regard to inflation in 2021, even as it seemed the problem was becoming sticky. Given their prior mistake, the Fed seems intent on not making another, even while risking pushing the economy into a recession. The bond market disagrees, with the 10 and 30-year treasury yields continuing to decline, signaling slowing growth and lower inflation.
Company behind ChatGPT worth $29bn
OpenAI is a company that creates artificial intelligence applications. It is currently valued at $29 billion. The company was founded in 2015 by people, including Sam Altman and Elon Musk. Recently, OpenAI launched ChatGPT, an AI application that can interact with users and perform various tasks, such as solving math problems and generating drafts and summaries. The application gained 1 million users in just five days. Some people are concerned that this type of AI could replace human jobs. It is also possible that AI could have a deflationary effect on the economy. ChatGPT is considered to be powerful, but its overall impact is still unknown. In 2022, Google announced its internal research and the availability of large language models, which are similar to ChatGPT but more advanced e.g. a generation ahead but it’s not available to the general public.
(this was written by ChatGPT)
Rotation out of tech continues
Investors continue to rotate out of technology and high-growth stocks in favor of other parts of the market. Since the Great Financial Crisis, tech stocks have trounced all other sectors, leading to major positioning being built up in the sector. For over a year, we have witnessed the unwinding of this positioning. The combination of higher rates, high valuations, and slower growth is driving investors out of these stocks. With higher rates, valuation matters more. Many of the tech stocks are still expensive, with large-cap names such as Apple, Microsoft, and Amazon still trading north of 20x. Growth rates are also slowing as enterprise software deals are being pushed off, demand for consumer electronics is slowing, and semiconductors remain in a glut. Investors are finding cheap valuations in other sectors and regions that offer similar or higher growth rates and moving their money there. The bottom line is that expensive stocks with slowing growth and high positioning do not work in a higher-rate environment.