Much of the second quarter was dominated by all things artificial intelligence (AI), after a new
version of OpenAI’s chatbot, ChatGPT, was released in March. The sophistication and capabilities
of this version of so-called “generative AI” caused an uproar within the tech world and beyond.

The first quarter of 2023 was akin to a play with three distinct acts. However, unlike a traditional play in which the first act introduces a problem, the second act a complication, and a resolution in the final act, the problem in this saga (rapidly rising interest rates) pre-dates the beginning of the story. And in the end, the audience is left unsure of a resolution.  (Hey, we didn’t say it was a good play).

“This time is different.” As 2022 began, that sentiment seemed pervasive. With the S&P 500 trading
close to all-time highs, continuing to be led by mega-cap technology and growth stocks, despite rising interest rates and worrisome inflation readings, the time-tested rule that ultimately, the stock market is a discounting mechanism, was seemingly being ignored. However, as the year progressed and inflation continued to surge, reaching a 40-year+ high of 9.0% in June, this time proved, unequivocally, not to be different.

According to ESPN major league baseball (MLB) analyst, Doug Glanville, MLB instituted the
“warning track” in 1949. This came after a Brooklyn Dodgers outfielder named Pete Reiser repeatedly crashed into the outfield wall, and continually injured himself. For non-baseball fans: the warning track is a strip of material averaging 15 feet wide, which serves to warn outfielders intently focused on catching a fly ball that they are dangerously close to colliding into the wall.

We find ourselves questioning the maxim, “Good things come to those who wait.” After waiting years for interest rates to rise, thereby ushering in a value stock renaissance, “Be careful what you wish for.” is perhaps a more appropriate sentiment. Indeed, while interest rates continued to rise in the second quarter, and value stocks outperformed, this came in the midst of a stock market selloff, which saw the benchmark S&P 500 enter bear-market territory in June.

The new year started as we expected: inflation continuing to rise, the Federal Reserve getting increasingly hawkish, interest rates rising, and with a rotation out of growth stocks into value. However, in mid-January, the market’s attention turned to Russia’s building of troops on Ukraine’s border, and ultimately to Vladimir Putin’s and Russia’s invasion – the consequences of which are myriad.

2021 began with a hopeful optimism of a soon-to-be vaccinated world, and our being able to put the COVID-19 pandemic in the rearview mirror. As the year progressed however, the reality was less sanguine, and a rollercoaster ride of setbacks, followed by incremental positives, followed by more setbacks ensued. An initially disjointed vaccine rollout gained momentum in the spring, but the take rate in the U.S. has been behind other industrialized nations.

Cases of whiplash must have spiked lately. After all, in a few short months, market commentators have abruptly transitioned from: “inflation is transitory” to “inflation might be more persistent” and now “prepare for stagflation!” As discussed in our last writing, the stock market had appeared to be fully in the Fed’s camp, perceiving the recent spike in inflation as a temporary phenomenon.

In this short question and answer session, our portfolio managers take on the questions that prospective clients ask us most often during the due diligence process. 

Transitory. Anyone following the markets during the second quarter heard the word bandied about ad nauseam, and the question of whether inflation would serve to be temporary (transitory) or more permanent drove the daily movements of the market.