Posts tagged ‘artificial intelligence’
Markets Surge Higher Despite Shutdown Anxiety Fire
Wars rage on in Ukraine and Gaza, political violence is on the rise at home, tariff-driven inflation remains debated, and anxiety over a looming government shutdown is intensifying. On the surface, this might sound like the perfect recipe for a market meltdown. But Wall Street seems unfazed. In fact, U.S. equities pushed to new record highs again this month, continuing the bull market’s relentless advance in the face of these concerns.
Here is a market performance snapshot for the month:
- S&P 500: +3.5% (+13.7% year-to-date)
- Dow Jones Industrial Average: +1.9% (+9.1% year-to-date)
- NASDAQ Composite: +5.6% (+17.3% year-to-date)
What’s fueling the optimism?
• A Strong Economy: The economy just produced a final +3.8% GDP growth for the 2nd quarter, and the Atlanta Federal Reserve is forecasting an even stronger economy for the 3rd quarter of +3.9% (see below).
• Robust Corporate Earnings: S&P 500 corporate profits surged by +11.8% in the 2nd quarter and consensus estimates call for 3rd quarter growth of +7.9%. Historically, CEOs tend to set conservative forecasts, therefore actual results often exceed low-bar expectations. Therefore, it’s very possible that Q3 earnings growth could achieve double-digit growth levels once again.
• A.I. Drive Still Alive: With trillions of dollars in A.I. spending plans already announced, hungry investors once again gobbled up A.I. tech stocks last month. For instance, Oracle Corp’s (ORCL) stock jumped +24% for the month in large part driven by a $317 billion increase in backlog orders during the company’s first fiscal quarter. Reportedly, the majority of the massive increase in orders came from one customer, OpenAI – the brains behind the A.I. juggernaut, ChatGPT. The rise in Oracle’s share price temporarily propelled CEO Larry Ellison past Tesla’s (TSLA) CEO Elon Musk as the world’s richest person, before markets began critically questioning whether OpenAI’s CEO (Sam Altman) can ultimately fund the hundreds of billions of dollars in Oracle commitments.
Source: Atlanta Federal Reserve
Shutdown Jitter History
Market anxiety has shifted from a hypothetical government shutdown nightmare to a scary reality, given the funding deadlines have already lapsed. Many investors are asking what this means for stocks. Fortunately, government shutdowns are nothing new. Our country has flourished over the last 50 years despite experiencing around two dozen shutdowns, many of which only lasted a few hours, a few days, or a few weeks. According to Kiplinger, since the 1970s, the stock market has averaged a +0.3% return during shutdown periods (see chart below).
Source: Kiplinger
In fact, the longest shutdown on record occurred most recently from December 2018 to January 2019 (35 days during President Trump’s first term) and resulted in a sharp +10% gain (see chart below).
Source: Kiplinger / YCharts
The partisan finger-pointing will continue, but history suggests that shutdowns are short-term noise with little bearing on long-term market direction. Long-term investors understand there is never a shortage of concerns during bad times (e.g., potential recessions, job losses, credit defaults, bankruptcies, etc.), or good times as well (e.g. fear of inflation, restrictive monetary policy, politics, etc.). Turning off the TV is often the best course of action (see also – Turn Off the TV).
What’s Next? Looking Ahead After more than 30 years of investing—including weathering the dot-com tech sense of purpose collapse in 2000—I’ve learned that markets always have a tendency of climbing a wall of worry, so it’s better to not react emotionally to daily news headlines. Rather, it’s better for investors to stay focused on those market leading, innovative companies and concentrate on those sectors experiencing long-term secular trends.
As we enter Q4 and head toward 2026, A.I. remains the defining theme. Since the launch of ChatGPT in November 2022, the S&P 500 has surged +24% in 2023, +23% in 2024, and +14% so far in 2025. Unfortunately, trees do not grow to the sky forever.
At Sidoxia Capital Management, we understand that valuations currently are stretched on a historic basis and that markets never move in a straight line. As a result, a correction at some point in stock prices should not come as a surprise to anyone. Nevertheless, whether you’re bullish on the productivity gains from large language models (LLMs) or skeptical of over-investment and hype, one thing is clear: A.I. is here to stay, and it doesn’t matter if you believe the government shutdown flames will grow into an inferno or fizzle out in smoke, which is usually the case.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in ORCL, TSLA, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
A.I. Field of Dreams
In the 1989 Academy Award–nominated film Field of Dreams, the lead character Ray Kinsella (played by Kevin Costner) hears a mysterious voice whisper, “If you build it, he will come.” Acting on blind faith, Ray builds a baseball diamond in the middle of his Iowa cornfield, risking financial ruin. Against all logic, the field draws a flood of visitors.
Today, a similar “field of dreams” is being built—not with corn, but with data centers. Instead of baseball players, it is artificial intelligence (AI) models, applications, and users who are coming.
The Market’s AI Momentum
The AI boom has already reshaped markets with all three benchmarks hitting record highs. Last month, the S&P 500 climbed +1.9%, while the NASDAQ rose +1.6% and Dow Jones Industrial Average surged +3.2%. Year to date, the indexes are up +10%, +11%, and +7%, respectively.
Behind this surge lies an unprecedented wave of AI infrastructure investment. Hyperscalers—Amazon.com (AMZN), Microsoft Corp. (MSFT), Google-Alphabet (GOOGL), Meta Platforms (META), and others—are pouring hundreds of billions into AI, much of it flowing directly to NVIDIA Corp. (NVDA), the undisputed leader in GPUs (Graphic Processing Units) powering the world’s AI engines. How large is the spending? NVIDIA CEO Jensen Huang estimates $3 trillion to $4 trillion will be spent this decade to fuel the AI revolution.
Source: Visual Capitalist
The Scale of AI’s Buildout
To put this into perspective:
- Amazon is projected to spend over $100 billion in 2025 alone, more than its cumulative capital expenditures from 2000–2020 combined.
Meta is constructing its $10 billion+ Hyperion data center in Louisiana—a sprawling 4 million sq. ft. complex across 2,250 acres, powered by a $4 billion natural gas plant. The footprint is so gargantuan it could cover much of Manhattan (see graphic below).
- xAI’s Colossus, a 750,000 sq. ft. data center in Memphis, Tennessee was completed in just 122 days—equivalent to building 418 homes in half the time it normally takes to construct one house (see slide below).
Source: BOND (Global Technology Investment Firm)
This breakneck pace of spending underscores the urgency and competitive pressure driving the global AI arms race.
The Origin of the AI Floodgates Opening
The spark was lit on November 30, 2022, when OpenAI released its LLM (large language model) called ChatGPT. Within two months, it amassed 100 million users.
Today, ChatGPT’s metrics have blasted much higher (see slide below):
- 800 million weekly active users
- 20 million paid subscribers
- $3.7 billion in revenue (as of April 2025)
Source: BOND (Global Technology Investment Firm)
But OpenAI is far from alone. Google (Gemini), xAI (Grok), Anthropic (Claude), Meta (LLaMA), Amazon (Titan), Perplexity, and DeepSeek are all competing with their own LLMs. In total, over 1 million machine learning models now exist (see slide below) — each requiring costly compute power and pricey data centers.
Source: BOND (Global Technology Investment Firm)
Bubble or Productivity Breakthrough?
With trillions flowing into AI, a natural question arises: Is this a bubble?
Even OpenAI CEO Sam Altman admits we’re in an AI bubble :
“When bubbles happen, smart people get overexcited about a kernel of truth…Someone is going to lose a phenomenal amount of money… and a lot of people are going to make a phenomenal amount of money.”
Both realities can be true:
- Yes, hyperscalers are spending like “drunken sailors.”
- Yes, AI demand and productivity benefits are real and growing exponentially.
Consider the trajectory of global cloud revenues: from nearly $0 a decade ago to $300 billion today—a +37% CAGR (see chart below).
Source: BOND (Global Technology Investment Firm)
And the primary reason for cloud growth can be attributed to AI productivity benefits. A recent SAP survey found that workers using AI save nearly one hour per day on average. That’s transformative for companies: higher productivity without needing proportional hiring.
AI Use Cases Expanding Aggressively
AI’s applications now span nearly every sector (see slide below):
- Technology – software engineering, code generation
- Customer Service & Marketing – customer support and call centers
- Transportation – autonomous vehicles and logistics
- Healthcare – drug discovery and development
- Supply Chains – precision manufacturing and optimization
- Automation – multi-purpose robotics
- Cybersecurity – threat detection and prevention
- Education – personalized lessons and curriculums
- Energy – grid optimization and demand forecasting
Source: BOND (Global Technology Investment Firm)
The New Field of Dreams
Throughout history, every great leap—printing press, steam engine, electricity, internet—has required massive upfront investment before the payoff arrived. AI is following the same path. Today, we are in the midst of building a new AI Field of Dreams. However, now, the data centers are the new baseball fields. And as with Ray Kinsella’s diamond, the masses are indeed coming.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 1, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GOOGL, META, AMZN, MSFT, NVDA, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in SAP or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
New Year, New AI Era & New Tariff Sheriff
The first month of 2025 started with a bang when newly-inaugurated President Donald Trump announced a groundbreaking AI (artificial intelligence) program led by business titan thought leaders called Stargate, which promises to spend a half trillion dollars on AI data center infrastructure projects and create hundreds of thousands of jobs. Just one week later, a wet blanket was placed on the Stargate euphoria when a Chinese AI upstart announced a technological breakthrough. Stocks moved lower on the last day of the month when Trump added insult to injury by confirming 25% Mexican/Canadian tariffs and 10% additional Chinese tariffs would be implemented immediately.
Regardless, positive economic and corporate data coupled with other pro-business fiscal policies (e.g., deregulation and lower proposed taxes) allowed the financial markets to finish the month with respectable gains. More specifically, the S&P 500 surged higher by +2.7%; the NASDAQ +1.6%; and the Dow Jones Industrial Average +4.7%.
DeepSeek = Deep AI Trouble?
Ever since OpenAI launched its ChatGPT language model (LLM) at the end of 2022, the global AI gold rush began. Just as the United States appeared to be dominating the AI race to global superiority, a bombshell was recently released, when a new Chinese AI upstart, DeepSeek, released a white paper claiming the company’s R1 large language model (LLM) rivaled competitors’ LLMs like OpenAI’s ChatGPT, Meta’s Llama (META), Anthropic’s Claude, and Alibaba’s Qwen (BABA) for a small fraction of the price spent by DeepSeek’s American rivals. The “DeepSeek Freak” caused a chain reaction of selling across a wide swath of companies (including NVIDIA Corp – NVDA) that have benefitted from hundreds of billions in AI infrastructure spending. The fear that Chinese AI competition may leapfrog U.S. companies, and potentially dramatically reduce AI-related capital expenditures caused the NASDAQ to almost fall -2% last week, and AI juggernaut NVIDIA shed more than a half trillion dollars in the company’s market value in a single day. Overall, U.S. stocks lost more than a trillion dollars in value on the day of the DeepSeek Freak unveiling.
Although investors were initially panicked by the DeepSeek revelations, not all of the Chinese claims have been substantiated. In fact, a just-released report by SemiAnalysis, a semiconductor research and consulting firm, states that DeepSeek’s costs for its R1 LLM likely exceed $500 million, much higher than the $6 million training costs stated in DeepSeek’s initial pronouncement.
Source: NBC News
New Tariff Sheriff in Town
While many investors were hoping for a delay in the implementation of President Trump’s tariffs on Mexico, Canada, and China, Trump decided to move full steam ahead with a February 1st start date. In 2023, Mexico was the U.S.’s largest trade partner and Canada was the second largest. These Mexican and Canadian tariffs are very broad based and impact many different industries, including autos, agricultural products, and crude oil. You can see the extent of the impact in the graphic below graphic below.
Source: VisualCapitalist.com
But what does this mean for the economy? In short, it will mean higher prices for U.S. consumers and businesses. The Tax Foundation, an 85-year-old, non-partisan, tax policy non-profit attempted to quantify some of the potential impacts from the proposed tariffs. The bottom-line findings from the Tax Foundation were that tariffs would “shrink economic output by -0.4% and increase taxes by $1.2 trillion between 2025 and 2034 on a conventional basis, amounting to an average tax increase of more than $830 per US household in 2025.” Please, also see table below (Scenario 2).
Source: Tax Foundation
In addition to American consumers having to pay higher taxes and prices for tariffed import products, there will be an estimated -344,000 jobs lost and there could be unintended consequences from retaliatory tariffs imposed on U.S. exports (i.e., our goods shipped internationally will be priced uncompetitively). In fact, Canada and Mexico just jointly announced tit-for-tat tariffs on U.S. goods and services, which will hurt these U.S. sales abroad.
With all of that said, the bark of the 25% tariffs on Mexico and Canada, along with the 10% in additional tariffs on China could be worse than the actual bite. Especially, if Trump uses these tariffs successfully as a negotiating tool and provides foreign countries with significant exemptions.
It’s also important to keep the size of these tariffs in context. Imports of foreign good and services only represented 13.9% of the Unted States’ Gross Domestic Product in 2023. Of that small percentage of imports, Mexico, Canada, and China only represent a fraction of that. It’s true that imports subtract from our country’s economic activity, but even if tariffs on foreign goods lead to the consumption of more American manufactured products, those benefits will be somewhat offset by higher inflated prices that will pinch consumer wallets. The new year marks an exciting new era of AI and global trade, but with that comes many new threats and opportunities. Throughout our 17-year history at Sidoxia Capital Management, we have successfully navigated these pivot points, and we are excited about effectively managing through this current transitional period.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 3, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in META, NVDA, certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BABA or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.
Another Hot Month, Another Fresh Record
Summer is coming to a close, but the weather is not the only thing that remains hot. The stock market has been scorching hot as well. Both the S&P 500 and Dow Jones Industrial Average blazed to all-time record highs last month. In fact, both of these indexes have risen seven out of eight months this year, including gains in the last four consecutive months. More specifically, the S&P 500 was up +2.8% last month and +18.4% this year, while the Dow Jones has advanced +1.8% for the month and +10.3% for the year.
How can this surging bull market be in existence while undergoing a war between Russia and Ukraine; military conflict in Gaza; a nasty Japanese Yen Carry Trade unwind; a highly divisive upcoming presidential election; a weakening economy; and rising unemployment (see chart below)?
Source: Calafia Beach Pundit
For all investors and traders, there is never a shortage of issues to worry about, even when times are good. However, despite the long laundry list of concerns, there are plenty of opposing tailwinds supporting the upswell in stock prices, starting with growing record corporate profits with strength forecasted through 2026 (see chart below).
Source: Yardeni.com (Yardeni Research)
Another factor underpinning the strength of stocks has been the decline in the inflation rate. The latest headline inflation rate (CPI – Consumer Price Index) fell to 2.9% in July, and if you exclude shelter costs, inflation has fallen below the Federal Reserve’s 2% target rate.
Source: Calafia Beach Pundit
Conversely, the story was quite different in 2022 when the Federal Reserve began its crusade against out-of-control inflation (see chart below) by starting its first of 11 interest rate hikes that spanned from January 2022 through July of 2023. The net result was a stock market that tanked -19% in 2022. More recently, the Fed has clearly signaled that inflation is more under control with traders predicting a 100% probability of a -0.25% or -0.50% cut in the targeted Federal Funds interest rate on September 18th. The Federal Reserve Chairman Jerome Powell gave a dovish speech at the annual policy meeting in Jackson Hole, Wyoming strongly portending September action – the first cut in four years since the pandemic.
AI Arms Race on Spending
Another dynamic contributing to new stock market record highs is the boom in AI (Artificial Intelligence) spending by the technology behemoths like Amazon.com Inc. (AMZN), Microsoft Corporation (MSFT), Meta Platforms Inc. (META), and Google – Alphabet Inc. (GOOGL). As I have been talking and writing about for some time (see World of AI), there is an arms race in spending to create the next, latest-greatest large language model (LLM) like ChatGPT. The goal is to bring more efficiency and accuracy to businesses and provide consumers more pleasure and time savings at both work and home. As you can see from the chart below, the four colossal technology companies previously mentioned are currently on a run-rate of spending more than a mind-boggling $200 billion annually, much of that going to the king of AI GPU (Graphics Processing Unit) manufacturing, NVIDIA Corporation (NVDA).
Why are companies spending so much on AI? Because they agree with NVIDIA CEO, Jensen Huang, who last week stated, “Generative AI will revolutionize every industry.” Despite all the spoils migrating to NVIDIA, traders were still looking for warts on the AI supermodel when they reported 2nd quarter results last week. Nonetheless, NVIDIA still delivered its 5th consecutive quarter of greater than 100% revenue growth, while generating revenues of almost $100 billion over the last 12 months – not too shabby. Although greedy investors wanted more, the stock was still up +2% for the month and +141% so far this year.
Source: Sherwood News
While economic, political and geopolitical concerns have been boiling over around the world, the stock market continues to sizzle higher. Declining inflation and interest rates, escalating business profits, and spiking artificial intelligence expenditures across corporate America have kept stocks cooking to record highs. It’s been a sweltering summer but not yet too hot for investors to get roasted out of the stock market kitchen.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 3, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including AMZN, MSFT, META, GOOGL, NVDA, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Economic & Inflation Information Create Market Jubilation
Ever since the Federal Reserve went on a crusade to increase interest rates and slow the progression of inflation at the beginning of 2022, investors have been cheering for a Goldilocks-type of economic “soft landing.” Last month, this narrative remained intact.
The S&P 500 index surged +3.5% for the month, the technology-heavy NASDAQ rocketed +6.0% (fueled by NVIDIA and other AI-related companies), and the Dow Jones Industrial Average a more modest +1.1% move thanks to the contribution of older economy stocks.
Despite the looming presidential election this November and the recent debate, the stock market has continued on a +56% bull market tear since the October 2023-low, eight months ago (see chart below). The not-too-hot, not-too-cold economic data have provided comfort to investors. For example, growth in Gross Domestic Product (GDP), the broadest measurement of economic activity, was positive (+1.4%) during the first quarter and it is expected to modestly accelerate in the second quarter (+2.2%), as forecasted by the Federal Reserve Bank of Atlanta.
In addition, the job and inflation stories are staying consistent with the “soft landing” plot line, as well. The unemployment rate has been creeping higher, but currently remains near multi-decade lows at 4.0%. Inflation also continued its downward trend as evidenced by last week’s Core PCE inflation data (the Federal Reserve’s favorite inflation gauge), which came in at +2.6%, the lowest level since March of 2021 (see chart below).
Gasoline and food costs are significant inputs to the overall declining inflation dynamics. The two largest crops in the United States are corn and soybeans, and with those prices down significantly year-over-year (see chart below), it should come as no surprise that consumers are finally seeing some relief in skyrocketing food prices. Declining gasoline prices have also chipped-in to the improving inflation outlook.
With all these economic statistics harmoniously aligning with a “soft landing” scenario, investors are currently comfortable in forecasting one interest rate cut over the next six months, and three and a half interest rate cuts over the next 12 months (see chart below).
Source: Yardeni Research
But a bull market cannot survive on interest rate cut expectations alone. Over the long-run, stock prices generally follow the direction of corporate profits, and as the chart below indicates (red line), fortunately, the path of profits has been rising after a period of stagnation last year.
Source: Yardeni Research
The last eight months have been an exhilarating ride in the overall stock market, which has been propelled by the multi-trillion dollar technology companies participating in the A.I. (Artificial Intelligence) buildout revolution (i.e., NVIDIA, Microsoft, Alphabet-Google, Apple, Meta Platforms, Amazon, et.al.). However, neither trees nor stock markets can grow, uninterrupted, to the sky forever. The recent environment has been jubilant for investors, but party participants cannot go on forever without experiencing a hangover. The best advice is to celebrate responsibly, while managing the risk of your investment portfolio, because eventually the cops will arrive and the party will come to an end.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including NVDA, MSFT, GOOGL, AAPL, META, and AMZN but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
The Art of Maximizing Gains and Minimizing Taxes in a World of AI
The AI Wave
The weather may be cold during winter, but stocks were scorching hot last month, fueled in part by the surge in performance from AI (Artificial Intelligence) stocks. More specifically, the Dow Jones Industrial Average was up +2.2% to 38,996. The S&P 500 surged +5.2% to 5,096. And the AI-heavy Nasdaq index climbed the most by +6.1% to 16,092.
Leading the bull market brigade higher was NVIDIA Corp (NVDA), which saw its stock launch higher by +29% for the month after reporting eye-popping quarterly revenues of $22 billion, more than tripling versus last year’s comparable quarter. Customers of NVIDIA, like Meta Platforms, Inc. (META), are also benefiting from the rising tide of investor sentiment.
To put this AI wave into perspective, you need look no further than to the comments made by Meta CEO Mark Zuckerberg, who stated by the end of 2024, the company should have 350,000 of NVIDIA’s H100 graphics processing units (GPUs) as part of the company’s AI infrastructure. At roughly $25,000 to $30,000 per GPU, the total cost is likely approaching $10 billion for just this one NVIDIA customer. Also, Dell Technologies’ (DELL) stock price opened more than +30% higher today after reporting quarterly financial results that exceeded forecasts due to robust demand for AI servers, which led to their backlog almost doubling in three months to $2.9 billion.
When you have corporate America in addition to the large cloud data center providers (think Amazon Web Services, Microsoft Azure, and Google Cloud) all battling to secure NVIDIA chips for their generative AI, machine learning initiatives, you can understand why NVIDIA’s stock is up +250% in one year to a company value of $2 trillion.
Japan’s Nikkei & Dow Both Break 39,000 Record Concurrently
Not only did the Dow hit an all-time record high of 39,000 last month, but a stunning coincidence also occurred in Japan. The Nikkei 225, which is like the Japanese equivalent of the Dow Jones Industrial Average, also hit a record high of 39,000 last month. What’s the big difference between these two indexes simultaneously surpassing a record 39,000 in the same month?
It took the Nikkei over 34 years to surpass its previous record peak, which was last achieved in 1989 when Japan experienced a massive bursting of an asset bubble. On the other hand, it merely took the Dow just one month to break its previous record…not four decades. Worth noting, so far in 2024, the Nikkei has been the world’s best-performing major index surging 19%, almost triple the gain of the S&P 500 index.
Tax Time
April is fast approaching, which means it’s that time of the year when Uncle Sam will come knocking on your door with your tax bill. Perhaps your taxes have already been prepaid and a refund is coming your way. Regardless, the goal of long-term investing is to master the art of maximizing returns and limiting taxes subject to your risk tolerance.
How does one create an investment masterpiece? One way to maximize return is to lower costs, including lower management fees, fund fees, and transaction costs. You can think of these investment costs as a leaky faucet. In the short-run, most people do not care about or are unaware of a leak.
The same principle applies to investment fees/costs. Investors can ignore these fees in the short-term, but over months or years, these costs can become enormous and destructive. I experienced this firsthand. Recently, normal monthly water bill was $40, but one leaky toilet resulted in an $800 monthly bill…ouch! Just imagine what unknown leaky costs on your investments could mean for your retirement. Do you want high or unknown investment fees to delay your retirement by years? I think not. Focus on lower costs because quite simply, the less you pay, the more you keep, and the earlier you can retire.
Another way to maximize your investment performance is to benefit from the power of compounding. This phenomenon can only be achieved via the snowball-effect of long-term investing. This is why Albert Einstein called compounding the “8th Wonder of the World.” At Sidoxia Capital Management, we have experienced this marvel on many of our investments, including our exponential gains in Amazon.com, which we first purchased in 2008 at s split-adjusted price of about $2.95 per share. The stock price recently closed at $177, a 60-fold increase from our initial purchase.
The risk-adjusted aspect of your nest-egg is also important because most people should consider decreasing risk as you more closely approach retirement age, especially if you are planning to tap your investments for liquidity. If risk wasn’t a consideration, going to the Las Vegas roulette table and betting your life savings on black might be a good idea. Sure, you might have a chance of doubling your money instantly, but you could also lose it all in a blink of an eye.
Another way of thinking about risk, since we are in the heart of ski season, is to contemplate a ski instructor’s advice for an 80-year-old beginner vs. an experienced Olympic downhill gold medalist. It wouldn’t make sense for the 80-year-old beginner to train on the steep, advanced black diamond runs. Similarly, it wouldn’t make sense for the gold-medalist Olympian to train on the flat beginner runs. The same concept holds true for investing. Young investors generally can take on more risk, while retirees often should be more conservative in their asset allocation, especially if they need liquidity from their investments to fund their living expenses and lifestyle.
Although it would be nice to have ChatGPT create a luxurious retirement for you with a click of a button, unfortunately life is not that simple. You certainly can, and should, take advantage of the AI revolution in your investment portfolio to support your retirement goals, but successful investing requires more than that. With over 30 years of investment experience under my belt, at Sidoxia, we understand there are multiple facets to successful investing. In a diversified portfolio that that takes account of your risk tolerance, we strongly believe low-cost, tax-efficient, long-term investing is the best way to create your retirement masterpiece.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks, including NVDA, META, GOOGL, AMZN, MSFT, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in DELL or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
AI Revolution and Debt Ceiling Resolution
On the surface, last month’s performance of the stock market as measured by the S&P 500 index (+0.3%) seemed encouraging, but rather pedestrian. Fears of sticky-high inflation, more potential Federal Reserve interest rate hikes, contagion uncertainty surrounding a mini-banking crisis, along with looming recession concerns led to a -3.5% monthly decline in the Dow Jones Industrial Average (-1,190 points). The good news is that inflation is declining (see chart below) and currently the Federal Reserve is expected to pause from increasing interest rates in June (the first time in more than a year).
Source: Calafia Beach Pundit
Overall stock market performance has been a mixed-bag at best. Adding to investor anxiety, if you haven’t been living off-the-grid in a cave, is the debt ceiling negotiations. Essentially, our government has maxed out its credit card spending limit, but Republicans and Democrats have agreed in principle on a resolution for an expanded credit line. More specifically, the House of Representatives just approved to raise the debt ceiling by a resounding margin of 314 – 117. If all goes well, after months of saber rattling and brinksmanship, the bill should be finalized by the Senate and signed by the President over the next two days.
Beyond the Washington bickering, and under the surface, an artificial intelligence (AI) revolution has been gaining momentum and contributed to the technology-heavy NASDAQ catapulting +5.8% for the month and +23.6% for 2023. At the center of this disruptive and transformational AI movement is NVIDIA Corp., a leading Silicon Valley chip manufacturer of computationally-intensive GPUs (graphics processing units), which are used in generative AI models such as OpenAI’s ChatGPT (see NVIDIA products below). Adoption and conversations surrounding NVIDIA’s AI technology have been spreading like wildfire across almost every American industry, resulting in NVIDIA’s stratospheric stock performance (+36% for the month, +159% for the year, +326% on a 3-year basis).
Source: NVIDIA Corp. – the computing engines behind the AI revolution.
Why Such the Fuss Over AI?
Some pundits are comparing AI proliferation to the Industrial Revolution – on par with productivity-enhancing advancements like the steam engine, electricity, personal computers, and the internet. The appetite for this new technology is ravenous because AI is transforming a large swath of industries with its ability to enhance employee efficiency. By leveraging machine learning algorithms and massive amounts of data, generative AI enables businesses to automate repetitive tasks, streamline processes, and unlock new levels of productivity. A study released by MIT researchers a few months ago showed that workers were 37% more efficient using ChatGPT.
If you have created an account and played around with ChatGPT at all you can quickly realize there are an endless number of potential applications and use-cases across virtually all industries and job functions. Already, application of generative AI systems is disrupting e-commerce, marketing, customer service, healthcare, robotics, computer vision, autonomous vehicles, and yes, even accounting. Believe it or not, ChatGPT recently passed the CPA exam! Maybe ChatGPT will do my taxes next year?
Other industries are quickly being disrupted too. Lawyers may feel increased pressure when contracts or briefs can be created with a click of the button. Schools and teachers are banning ChatGPT too in hopes of not creating lazy students who place cheating and plagiarism over critical thinking.
At one end of the spectrum, some doomsday-ers believe AI will become smarter than humans, replace everyone’s job, and AI robots will take over the world (see Elon Musk warns AI could cause “civilization destruction”). At the other end of the spectrum, others see AI as a transformational tool to help worker productivity. As generative AI continues to advance, its impact on employee efficiency will only grow, optimizing processes, driving innovation, and reshaping industries for a more productive future. Embracing this transformative technology will be critical for businesses seeking to thrive in the new digital age.
2023 Stock Performance Explained – Index Up but Most Stocks Down
Although 2022 was a rough year for the stock market (i.e., S&P 500 down -19%), stock prices have rebounded by +20% from the October 2022 lows, and +9% this year. This surge can be in large part attributed to the lopsided performance of the top 1% of stocks in the S&P 500 index (Apple Inc., Microsoft Corp., Amazon.com Inc., NVIDIA Corp., and Alphabet-Google), which combined account for almost 25% of the index’s total value. These top 5 consumer and enterprise technology companies have appreciated on average by an astounding +60% in the first five months of the year and represent a whopping $9 trillion in value. It gets a little technical, but it’s worth noting these larger companies have a disproportionate impact on the calculation of the return percentages, and vice versa for the smaller companies. To put these numbers in context, Apple’s $2.8 trillion company value is greater than the Gross Domestic Product (GDP) of many entire countries, including Italy, Canada, Australia, South Korea, Brazil, and Russia.
On the other hand, if we contrast the other 99% of the S&P 500 index (495 companies), these stocks are down -1% each on average for 2023 (vs +60% for the top 5 mega-stocks). If you look at the performance summary below, you can see that basically every other segment of the stock market outside of technology (e.g., small-cap, value, mid-cap, industrial) is down for the year.
2023 Year-To-Date Performance (%)
S&P 500: +8.9%
S&P 500 (Equal-Weight): -1.2%
S&P Small-Cap Index: -2.3%
Russell 1000 Value Index: -2.0%
S&P Mid-Cap Index: -0.7%
Dow Jones Industrial: -0.7%
While most stocks have dramatically underperformed technology stocks this year, this phenomenon can be explained in a few ways. First of all, smaller companies are more cyclically sensitive to an economic slowdown, and do not have the ability to cut costs to the same extent as the behemoth companies. The majority of stocks have factored in a slowdown (or mild recession) and this is why valuations for small-cap and mid-cap stocks are near multi-decade lows (12.8x and 13.0x, respectively) – see chart below.
Source: Yardeni.com
The stock market pessimists have been calling for a recession for going on two years now. Not only has the recession date continually gotten delayed, but the severity has also been reduced as corporate profits remain remarkably resilient in the face of numerous economic headwinds. Regardless, investors can stand on firmer ground now knowing we are upon the cusp of an AI revolution and near the finish line of a debt ceiling resolution.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2023). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in NVDA, AAPL, MSFT, GOOGL, AMZN and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
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