Legislators came in just under the wire to work up a bipartisan deal to suspend the debt limit through early 2025. This takes the threat of default off the table until after the next presidential election. The debt ceiling is a significant macroeconomic concern that had the potential to introduce uncertainty into the market if it was not resolved. The deal includes caps on spending but not defense. Defense spending would increase to $886 billion which amounts to a 3% rise. With the COVID-19 public health emergency officially ended by President Biden in early May, this bill includes a provision that any unspent relief funds must be returned. The Congressional Budget Office has estimated this will amount to about $30 billion.
The S&P 500 has been stuck in a narrow trading range since November. Narrow trading ranges can be indicative of a market in consolidation, with investors awaiting new information or catalysts that could trigger a directional move. As Congress moved to approve the expansion of the debt ceiling towards the end of May, the S&P finally broke above the 4200 level which has marked the upper band of the trading range. The technology sector was up 9% for the month and led the way for the S&P to push higher, along with communication services (such companies as Google and Meta) which was up 6%.
The rally in the tech sector has been driven in part by advancements in artificial intelligence (AI). AI still has so much untapped potential but currently is being used to increase efficiency, automation, and productivity. Although this technology is exciting, we remain prudent in our allocations to investments with exposure to AI. Below is a chart of the technology benchmark. To the right of the yellow line is the period from May 17, 2023, to June 5, 2023. It has clearly broken out well above its 100-day moving average (the blue line), indicating that investors see the sector as bullish.
Graphic chips, or GPU’s, are the lifeblood of AI systems. There is only one issue: The demand is far outpacing the supply. The CEO of a startup that helps companies build AI models like chatbots has compared the shortage of these chips to toilet paper during the pandemic. How many of these chips are necessary? According to UBS analysts, the first version of ChatGPT (the most prominent AI currently) used approximately 10,000 chips. Elon Musk has come out to state that his estimate of the updated version of ChatGPT has 3-5 times that amount.
While large-cap technology stocks have clearly broken out into a new uptrend, that is definitely not the case in other areas of the market (we’ll discuss that more in the next update), but those stocks have helped the S&P 500 Index to move above its trading range. And with that development, we are continuing to move the portfolios deeper into equities, both domestic and foreign.
While we are skeptical that stocks can charge ahead in a straight line through the end of the year, we always move where the trends lead us.
We encourage you to inform your advisor of any changes in your life that might affect your investment objectives in the short and long terms so we can best adjust how we manage your money.
Christopher Jones
Trader
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