On Friday, February 9 the S&P 500 closed above 5,000 for the first time. I began my career in the investment business on August 1, 1993 when the S&P 500 was at 454 – an over thirty-year journey from under 500 to over 5,000.1 In spite of all the economic and financial crises, natural disasters, policy mistakes, political divides, and wars, for the 30 years from January 1, 1994-December 31, 2023, the S&P 500 has produced returns at an average annual rate of 10.04%.2
The technological revolution has played a huge part in driving these returns. When I started my training as an investment analyst on Wall Street in ‘93, the internet was primarily the domain of the Department of Defense and academic institutions. The fax machine was considered a marvelous device. A person hand delivered interoffice memos to employees. There was, however, one computer terminal for the whole firm called a Bloomberg terminal where one could access all kinds of news and financial information My firm paid many thousands of dollars for it in monthly subscription fees. That terminal was a precursor to the commercialization of the internet which then transformed our world within just a few short years.
One consistent challenge over these three decades has been to weigh the impact of innovation against economic concerns. In 1993-94, there was great concern about building inflationary pressures. The Federal Reserve began a year-long interest rate hiking cycle where they doubled the overnight interest rate. Bonds had a negative year, and there was lots of talk about a pending recession. Sound familiar?
Meanwhile, there was a company founded in April 1994 called Mosaic Communications Corp that had an idea to connect video gamers to each other. That company changed course– renamed as Netscape, it released an internet browser that became Navigator, which allowed the public to easily access the internet.3 By 1995 there was no recession, and the S&P 500 began a stunning five-year run of annual average returns of 27.9% inspired by the rollout of the internet.4 Ultimately, by 2000, the euphoria melted, and the internet bubble burst.
The echoes of that time resonate to some degree in today’s world. The Fed has aggressively been fighting inflation and for the moment looks to be on a successful path. The economy overall has shown great resilience in spite of the interest rate hikes, with fourth quarter 2023 GDP rising at annual rate of 3.3%5 and unemployment hovering around 3.7% for the last two months.6 Inflation rose at annual rate of just 2.7% for the fourth quarter, inching towards the Fed’s 2% target.7 A recession has so far been averted, but we also know there is historically a lag effect of a year or longer before the economy feels the full impact of interest rate hikes.8 A significant economic slowdown may still be out there.
Like the Netscape story, Open AI’s release of Chat GPT in November of 20229 has unleashed a flurry of investment by businesses and excitement in markets around the impact of artificial intelligence (AI) on our lives. The companies fueling the AI buildout like chipmaker Nvidia have seen their shares soar, but is another bubble forming? Previously, we have written about the Magnificent 7 stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla— the mega-cap tech firms that have recently dominated the S&P 500 returns. For now, valuation of firms like Nvidia are still relatively modest when compared to the leading companies at the peak market internet boom10, but surging share prices should warrant caution.
We have invoked the great investor Warren Buffett before. He said it is wise for investors, “to be fearful when others are greedy and to be greedy when others are fearful.”11 So as others may be entering the greedy phase when it comes to the exuberance around AI, it is appropriate to ensure, as we are consistently doing, that your asset allocation plan is where it should be and that we maintain a well-diversified program on your behalf across the financial markets in both equities and fixed income.
In equities, our program is global, with 45% of the allocation dedicated to large U.S. equities (S&P 500-type stocks) and the rest spread across small U.S., international and emerging markets stocks. In the event the S&P 500 returns falter, these other areas may outperform. With interest rates higher, the fixed income side can play a greater role in achieving long-term return goals, and the pressure to stretch risk parameters has been somewhat alleviated.
As we celebrate the S&P 500 crossing the 5,000 milestone and will one day celebrate crossing the 10,000 threshold, we keep in mind that the road to those milestones is never a straight line–there will likely continue to be a mix of curves and detours as markets experience great optimism but also nasty pessimism.
Our job is to help you stay centered on that road and always on track towards ultimate success.
1. “S&P 500 Historical Prices by Month.” Multpl, www.multpl.com/s-p-500-historical-prices/table/by-month
2. Mitchell , Cory. “Historical Average Stock Market Returns for S&P 500 (5-year to 150-year Averages).” Trade That Swing, 9 Feb. 2024, tradethatswing.com/average-historical-stock-market-returns-for-sp-500-5-year-up-to-150-year-averages.
3. Netscape Communications Corporation – Company Profile, Information, Business Description, History, Background Information on Netscape Communications Corporation. www.referenceforbusiness.com/history2/57/Netscape-Communications-Corporation.html
4. Maggiulli, Nick. “S&P 500 Historical Return Calculator [With Dividends].” Of Dollars and Data, 2 Feb. 2024, ofdollarsanddata.com/sp500-calculator.
5. Gross Domestic Product | U.S. Bureau of Economic Analysis (BEA). www.bea.gov/data/gdp/gross-domestic-product.
6. “Economics News Release – Employment Situation Summary.” U.S. BUREAU OF LABOR STATISTICS, 2 Feb. 2024, www.bls.gov/news.release/empsit.nr0.htm.
7. Cox, Jeff. “Inflation in December Was Even Lower Than First Reported, the Government Says.” CNBC, 9 Feb. 2024, www.cnbc.com/2024/02/09/-inflation-in-december-was-even-lower-than-first-reported-the-government-says.html.
8. McGeever, Jamie. “Fed’s Rate Hike Lags Are About to Bite.” Reuters, www.reuters.com/markets/europe/feds-rate-hike-lags-are-about-bite-2023-07-13.
9. Thorbecke, Catherine. “A Year After ChatGPT’s Release, the AI Revolution Is Just Beginning.” CNN, www.cnn.com/2023/11/30/tech/chatgpt-openai-revolution-one-year/index.html.
10. Ross, Jenna. “3 Reasons Why AI Enthusiasm Differs From the Dot-Com Bubble.” Visual Capitalist, 1 Dec. 2023, www.visualcapitalist.com/sp/3-reasons-why-ai-enthusiasm-differs-from-the-dot-com-bubble.
11. Brownlee, Adam P. “Warren Buffett: Be Fearful When Others Are Greedy.” Investopedia, 15 Sept. 2023, www.investopedia.com/articles/investing/012116/warren-buffett-be-fearful-when-others-are-greedy.asp.