Finding growth in an uncertain market

On Monday, August 5 a series of historic stock market drops across the world starting with the Japanese Nikkei exchange saw widespread selloffs. The Magnificent Seven, consisting of NVIDIA Corp., Amazon.com Inc., Apple Inc., Tesla, Meta Platforms Inc., Alphabet Inc. and Microsoft Corp. saw a combined drop in value of $653 billion.

These tech companies all have their own products, but much of their recent buzz has been tied to their role in the emerging industrial and business applications of Artificial Intelligence (AI).

Come Tuesday August 6 the markets had largely recovered and stabilized, but the episode served as a reminder that with as many moving parts as a global market has, making accurate predictions can prove challenging.

Keith Wirtz, as a CFA and the Chief Investment Officer for Union Savings Bank deals with the vagaries of the market every day. Speaking shortly before the market upset and overall recovery, Wirtz said that 2024 has been full of surprises.

“The Stock Market in general, and the US stock market in particular has done quite well, and I think that it has exceeded everyone’s expectations,” Wirtz said. “I think the biggest theme in the stock market as centered in the US has been the artificial intelligence theme.”

“There are a handful of stocks that everyone thinks of when you think of AI, and these stocks have been huge winners on Wall Street this year, at least through the first six months of the year. These stocks have not only been price performers, but they’ve been fundamentally really strong companies. They’ve been generating outsize earnings and cranking out a lot of revenue. This is really the sweet spot in the US stock market this year, these indexes are driving the indexes much higher, and a lot of other companies are having trouble just keeping up.”

While the gap between some of the most successful AI oriented companies and other parts of the index have closed in the first week of August, the fundamental strength Wirtz pointed to may be illustrated by a strong recovery the next day.

“It’s been a very concentrated market,” Wirtz said. “One driven by the stocks that fall under the AI team this year.”

Wirtz noted that he believes that AI will provide sweeping changes across the business landscape, generally by boosting worker productivity as opposed to wiping out jobs as some fear. While AI stocks are important to the market in the short term, AI technology can transform the economy.

“If I were to generalize, I think it’s going to have a positive influence on the conditions of price pressure inflation,” Wirtz said. “I think it’s going to be a huge boon in certain sectors of the US economy. I think Healthcare is going to be an obvious beneficiary of this new technology.”

Upstream from AI’s success are semiconductors, which are often made with equipment built by ASML in Wilton CT, alongside the energy and infrastructure to run data centers and computers.

On semiconductors, Wirtz said that increased demand to satisfy an expanding AI industry is likely to continue, but that eventually a new baseline level of demand will be reached without the ongoing shortages.

Likewise, the increased demand for energy not only from AI technology but expanding markets and standards of living the world over have convinced Wirtz that fossil fuels will remain an important part of the energy sector that will continue to draw investment.

“Energy is going to be a big issue for this country and for the rest of the world. It is in my estimation that the current policy to constrain the use of fossil fuels is not what is needed.”

He also pointed to nuclear energy as an important part of an “all of the above” approach to meeting growing energy needs both in the US and around the world.

“The stronger economies have access to cheaper energy sources,” he said. “That’s just economics 101.”

At home in Fairfield County, Wirtz said that high housing prices are the result of a number of factors, including a Covid pandemic surge of New Yorkers moving out of the city and buying up already limited stock. But he identified another issue as the underlying driver of local real estate woes.

“The biggest problem in real estate in my judgement right now is we had low inflation. We had low interest rates. And home prices are a function of interest rates,” said Wirtz. “When the cost of money is low people can buy bigger homes because of how the math works. When the price of money goes up it makes it harder to buy bigger homes. But we have not seen that the inverse holds true, and that’s because of the supply problem. And Connecticut is being impacted by the fact that if you own a home and you’ve got a 3 percent mortgage you don’t want to sell it to take on a 7 percent mortgage.”

The result is a sluggish secondary market for housing, and an inability for builders to keep up with the demand for new housing.

Taken as a whole, Wirtz viewed the economy as somewhat divided. He said he remains in the camp that believes that the economy may slow without seeing a major contraction, and that lower interest rates will help ensure that happens even if an early decision by the Federal Reserve would have been preferable.

“US corporations are experiencing an expansion in profits right now which is going to help things a lot. The labor markets continue to exhibit to me enough positives that I don’t think we’ll see a recession anytime soon,” Wirtz said.

“If you’re able to invest some of your household savings in the marketplace, particularly in the US marketplace, you’re probably feeling pretty good. If you have a 401k plan at work, you’re probably feeling pretty good,” Wirtz said.

However, Wirtz noted that many people do not fit that description, and that inflation is a regressive problem that hits the least well-off the hardest.

Regardless of one’s economic standing, Wirtz urged all business owners to pay close attention to the outcome of the upcoming 2024 election, as everything from IRS staffing to tax policy will be on the line.

“Over the next four years if you’re running a business you’ve got to pay attention to what’s going on with the government because I think taxes are going to be a really big part of what you’re doing.”