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Q1 2024 Market Update

How Will AI Change the Investment Landscape?

Published February 16, 2024  ·  By S Dee Davis

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Some Current Figures To Consider:

S&P 500 2024 P/E Ratio: 21X vs. historical around 16X

Our Equity Holdings P/E: 15X despite owning Novo Nordisk which is 45X.

S&P 400 Mid-Cap Index: 16X, which highlights just how expensive the mega-cap names are.

CPI Inflation: 3.5% (adjusted up last week). Truflation has lower numbers around 2.4%.
U.S. GDP Growth Q4 2023: Revised up to 3.4%
U.S. Federal Deficit % of GDP 2023: 7%.

Projection for U.S. Deficit in 2024: 8%. Astounding! And 3% of that 8% is going to interest – more than a third.

Effective Fed Funds Rate: 5.4%

9-Month T-Bill Rate: 5.28%. This tells us that there is likely no Fed rate cut soon, since the Fed Funds Rate is paused in the range of 5.25% to 5.5% and the 9-month signal is right there with it.

Secondly, let’s examine a few comments from Jamie Dimon from the JP Morgan call: Dimon’s comments are closely followed, so we’ll let him sum up the current economic environment. He said that JP Morgan’s consumer customers are fine. Housing prices are up, incomes are up, stocks are up, unemployment is low. JP Morgan’s lower tier income customer is struggling a bit.

Dimon said businesses also are in good shape. Profits are strong, etc.

Commercial real estate is OK too, at least at JP Morgan. Multi-family, which helped blow up NY Community Bank, also seems fine according to Dimon. But if interest rates were to rise 2%, then all assets are worth 20% less. And not just in real estate, but in all asset classes.

He mentioned that our current strong economy is largely the result of a lot of U.S. government fiscal spending and QE (emphasis added i.e. last quarters market update). However, Dimon warned that were were also OK in 1972.

In his annual letter, he mentioned that rates could go much higher and we could enter a stagflation environment. Wars and deficit spending are highly inflationary.

I’ll add to his comments and say that the economy feels very late-cycle-ish. Commodities have been rallying, interest rates may be peaking, inflation resurgence hard to tame, lots of speculation in RE, Bitcoin. All of that augurs toward late cycle activity.

How Will AI Change the Stock Investment Landscape? On to our titled topic. In order to find the answer to this complicated question, I asked ChatGPT 3.5 and then ChatGTP 4.0. So if the answer looks a bit too clean and well written, that’s why. Interestingly, only the conclusion changed between the two queries. Our comments in blue..

“AI is already significantly changing the stock investment landscape, and it's likely to continue shaping it in several key ways:

1. **Data Analysis and Prediction**: AI algorithms can analyze vast amounts of financial data much faster and more accurately than humans. They can identify patterns, correlations, and anomalies that humans might miss. This enables AI to make more informed predictions about stock prices and market trends. Much of this was already available but may get better and cheaper.

2. **Algorithmic Trading**: AI-powered algorithms execute trades based on predefined criteria without human intervention. These algorithms can react to market changes in real-time and execute trades at speeds impossible for humans. This high-frequency trading can lead to increased market efficiency but also poses risks such as flash crashes. No doubt hedge funds that trade via super-fast response will either use AI in the best way or get crushed.

3. **Risk Management**: AI systems can assess risk more comprehensively by considering a broader range of factors and scenarios than traditional risk models. They can also provide real-time risk assessment, helping investors make betterinformed decisions. Should make portfolio allocation decisions easily via set Q&A inputs. May be no need for Financial Planners anymore.

4. **Sentiment Analysis**: AI can analyze news articles, social media posts, and other textual data to gauge market sentiment. This information can be used to predict stock price movements and identify emerging trends or market sentiment shifts. Could result in more hedge funds using this short to mid-term strategy. It has been successful for some hedge fund managers like George Soros, and Stanley Drukenmiller.

5. **Portfolio Management**: AI can optimize investment portfolios by analyzing factors such as risk tolerance, investment goals, and market conditions. AIdriven portfolio management systems can rebalance portfolios, allocate assets, and identify opportunities for diversification more effectively than traditional methods. Again, portfolio allocation decisions should be easy for AI based on current statistical knowledge.

6. **Personalized Investment Advice**: AI-powered robo-advisors offer personalized investment advice based on individual financial situations and goals. These platforms use algorithms to recommend investment strategies, allocate assets, and manage portfolios, often at lower costs than human financial advisors. Another attack on Financial Planners. Look for cool apps doing this in the future.

7. **Market Regulation and Compliance**: Regulators can use AI to monitor markets for suspicious activities, insider trading, and other forms of market manipulation. AI algorithms can analyze vast amounts of trading data to detect irregularities and enforce compliance with regulatory requirements. But will they be smart enough to use it? Nah.

8. **Quantitative Analysis**: AI techniques such as machine learning can enhance quantitative investment strategies by identifying profitable trading opportunities and optimizing trading algorithms. Quantitative hedge funds and investment firms increasingly rely on AI-driven models to gain a competitive edge.” New quant strategies coming soon.

“Overall, AI is likely to continue revolutionizing the stock investment landscape by improving decision-making, increasing efficiency, and enabling new investment strategies. However, it also raises ethical and regulatory concerns, such as algorithmic biases, systemic risks, and the potential for market manipulation, which will need to be addressed as AI adoption in finance continues to grow.”

Thanks for the concise well-explained topic AI. Long term fundamental investment in compounders doesn’t really change much if any. There may be some improvement in screening tools, and more options. Very short term, the market could be more efficient. If AI could develop lie detection and nerve detection software for earnings calls, that would be very useful for those with access…

Thanks for reading and Happy Investing!