Stocks Diverge, Yields Rise, and Artificial Intelligence Theme Gains Traction

Monthly Client Letter
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®
AI Computer Generated Graphics

Photo Credit: Christopher Burns, Unsplash

Monthly Market Summary

  • The S&P 500 Index gained +0.5% in May, outperforming the Russell 2000 Index’s -0.8% return. There was significant sector return dispersion, with Technology, the top performer, gaining +8.9%, and Energy, the worst performer, returning -10%.

  • Corporate investment grade bonds produced a -1.8% total return as interest rates rose, underperforming corporate high-yield bonds’ -1.2% total return.

  • The MSCI EAFE Index of developed market stocks traded down -4.0%, underperforming the MSCI Emerging Market Index’s -2.4% return.

May 2023 Recap: Stocks Continue to Diverge & Treasury Yields Rise

This May marked a continuation of this year’s investment trends. In the equity market, large-cap stocks outperformed small-cap stocks for a third consecutive month, while Growth stocks outperformed Value stocks. The Nasdaq-100 Index of growth stocks returned +7.9% in May, bringing its year-to-date gain to +30.9%. Congressional debt ceiling negotiations were the primary focus in the credit market, where a sharp rise in yields led both Treasury and corporate bond prices to decline. The Bloomberg Commodity Index traded lower for a sixth consecutive month, with declines across energy and metals. While falling commodity prices could help ease inflation, the declines suggest demand is softening, and economic activity is slowing.

US Sector Returns (May in %)

2023 May US Sector Returns

One theme we are watching closely is the return gap within the equity market. The sizable performance gaps indicate that while the S&P 500 trades higher, the gains and strength are concentrated in a relatively small group of sectors and mega-cap stocks. For example, the S&P 500, which weights companies by market capitalization, is up +9.7% year-to-date. However, the equal-weighted version of the S&P 500 has posted a -0.7% total return, underperforming the market-cap-weighted version by -10.3%. This performance dispersion theme is also evident across S&P 500 sectors. Technology, Communication Services, and Consumer Discretionary traded higher in May, with year-to-date returns exceeding +17.5%. In contrast, the eight remaining S&P 500 sectors traded lower in May, with negative returns thus far in 2023.

Investors Excited by the Artificial Intelligence Revolution

One of the factors contributing to Technology’s strong 2023 return is excitement around artificial intelligence, or AI. AI, which refers to the ability of a digital computer or a machine to perform tasks commonly associated with human intelligence, is being hailed as the next big technological advance. It has the potential to revolutionize the economy by increasing productivity, replacing and/or automating certain jobs, and expanding corporate profit margins. Companies are mentioning AI more on earnings calls, and investors are rushing to find the big AI winners. While AI has the potential to be transformational, we believe the AI revolution is in its early innings. We will continue to watch the theme, but investors’ excitement may be premature today.

Our Insights

Featured
Election Driven Rally Pushes US Equities Higher
Election Driven Rally Pushes US Equities Higher

Stocks traded higher this week, with most of the gains occurring after the election. The S&P 500 reached a new all-time high, nearing the key 6,000 level. The broader equity market rally was notable as investors priced in the Trump administration’s pro-growth, reflationary policies. The past few weeks have been packed with market-moving events, but the calendar is expected to settle down as we approach year-end.

Treasury Yields Rise Following the Fed’s September Rate Cut
Treasury Yields Rise Following the Fed’s September Rate Cut

Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. Treasury yields climbed as investors considered the possibility that the Fed may not cut interest rates as much as previously expected. Concerns about fiscal spending also drove Treasury yields higher, with expectations for continued high government spending regardless of the election outcome.

The Next Two Weeks are Filled With Market-Moving Events
The Next Two Weeks are Filled With Market-Moving Events

This week, stocks traded lower after several weeks of consistent gains. The S&P 500 dropped -0.5%, underperforming the Nasdaq 100's +0.3% gain but outperforming the Russell 2000's -2.8% return. The Magnificent 7 rose over +2%, making Growth the only factor to trade higher. The next two weeks are filled with market-moving events, and once they pass, stocks could rally into year-end.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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