Monthly Report June 2023
Numerous market participants draw comparisons between the significance of AI and groundbreaking inventions such as fire, the wheel, or electricity. Within the realm of stock markets, those associated with AI have ignited a spectacular rally. Take, for instance, the US benchmark index S&P 500, which owes its positive performance this year solely to a handful of these AI-related stocks, while 8 out of 11 sectors have recorded negative returns year-to-date (see figure below). Among the limited group of winners, the IT/Technology sector (including Apple, Microsoft, Nvidia) stands out, alongside the Communication sector (including Alphabet/Google, Meta/Facebook), and Cyclical Consumer Goods (including Amazon, Tesla), all of which have remained in positive territory in 2023.
Source: investing.com; as of May 31, 2023
The parallels between the current AI boom and the emergence of the Internet and the Dotcom bubble of the late 1990s, respectively, are unmistakable. We often have a tendency to overestimate the short-term impact of a technology, while underestimating its long-term consequences. Both the rise of the Internet and the ongoing AI revolution have had significant implications for economic growth, inflation, and financial markets.
The Internet has indeed significantly enhanced productivity in various areas. The easy access to information, process automation, and the establishment of digital business models have facilitated more efficient workflows. Consequently, productivity and economic growth have been enhanced. The Internet has created new business opportunities and fostered the emergence of startups and e-commerce companies. Similarly, the prevailing AI boom has given rise to a myriad of new business concepts and innovations. AI-based solutions enable efficiency gains, personalization, and process automation, which can all contribute to growth across different industries.
Moreover, the Internet has engendered deflationary pressures through enhanced transparency and intensified competition, leading to reduced price levels for products and services. By harnessing automation and AI, comparable effects may transpire. More efficient processes and reduced costs precipitate productivity gains and may contribute to a reduction in inflation.
In financial markets, the Internet boom ultimately culminated in a speculative bubble that burst in March 2000. Many companies without a proven track record of profitability were traded at extremely high valuations during that period. Later, it was revealed that a prominent Internet analyst had been sending internal emails expressing doubts about certain stocks, while publicly presenting a positive outlook on them. These questionable practices contributed to a crisis of confidence and ultimately led to the bursting of the bubble.
Nevertheless, the Internet has brought about profound and enduring changes to the economic, political, and social landscape. While history does not repeat itself exactly, it often exhibits parallels or similar patterns across different epochs. In this context, the current dispute over the US debt ceiling is not unfamiliar territory for experienced market participants. Who could forget the well-known figures of President Bill Clinton and then-Speaker of the House, Newt Gingrich?