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👁️ Keep Your AI on the Prize

👁️ Keep Your AI on the Prize

Plus, this outperforming investment fund's top picks.

March 31, 2024

Happy Sunday to everyone on The Street.

The US stock market soared through the first quarter.

We saw the S&P 500 add 10.2%, marking its best first-quarter gain since 2019. The other two major indexes were no slouches either. The Dow made 5.6% gains, and the Nasdaq Composite ended the quarter up 9.1%

These gains are a result of a perfect storm that’s boosted investor sentiment and kept them interested in new opportunities:

Increased optimism that the Federal Reserve can pull off a soft landing.
The potential for a June rate cut despite sticky inflation.
Nvidia surged nearly 90% this year and fueled interest in AI stock picks.

The stock market gains this quarter have investors split on whether the rally can continue in the second quarter.

A Deutsche Bank Research survey from this week found that 45% of respondents believe the U.S. economy will be in a “no landing” scenario at the end of 2024. On the other hand, CNBC’s Fed survey found that the probability of a recession happening in the next 12 months fell to 32%.

🐂 Are you Bullish or Bearish on Q2 2024? 🐻

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Review: PCE Spotlight

Personal consumption expenditures, the Federal Reserve’s preferred measure of inflation, rose as economists expected in February, leaving markets frustrated as to the likely timing of interest rate cuts.

Personal spending rose by 0.8% to $145.5 billion, more than the 0.5% expected and higher than the 0.2% increase seen in January.

Key highlights from February’s Personal Consumption Expenditures inflation report:

The headline personal consumption expenditures price index rose by an annual rate of 2.5%, up from January’s 2.4% and in line with expectations.
The headline month-on-month rate rose by 0.3% in a shade lower than the 0.4% forecasts, after a 0.3% rise last month.
The core price index, stripping out volatile food and energy prices, rose by an annual rate of 2.8%, in line with consensus forecasts. January’s core price index rose by an upwardly revised 2.9%.
The core monthly rate rose at 0.3%, in line and down from January’s 0.4% rise.

The slight rise in the headline measure of PCE inflation was largely expected following a similar tick higher in the annual rate of the headline consumer price index in February, reported earlier this month.

Indeed, February’s headline CPI rose to 3.2%, up from January’s 3.1%. Markets had been expecting the annual rate to remain at 3.2%.

Friday’s data showed that spending on services increased by $111.8 billion, with the largest contributors to the increase being housing and utilities. The increase in services spending was accompanied by a $33.7-billion increase in spending on goods.

Personal income in February rose by $66.5 billion, or 0.3%, following a 1% surge in January — which is not unusual as annual salary negotiations are often settled in January. Expectations were for a 0.4% increase.

It appears with Friday’s data, the Fed’s favored inflation gauge, as with the CPI data, that the final mile down to the Fed’s target rate of 2% is the stickiest.

Reactions And Rate Implications

The Fed continues to monitor the latest inflation and labor market data for the ideal time to begin cutting interest rates. Its next policy meeting is May, but perhaps this will be too soon. The central bank currently sees the likelihood of cutting three times in 2024.

The CME Group‘s FedWatch tool shows 95.8% of traders expect the Fed to hold rates steady in May as of Friday morning, up from 90.7% on Thursday.

For the Fed’s June meeting, 61% of traders expect an interest rate cut as of Friday, according to the FedWatch tool.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: “The June meeting is still three months away, and we are sticking to our view that better inflation data and a clear softening in the labor market will push the Fed into easing.

“FOMC members have made it very clear that they are sensitive to the most recent data, despite the unreliability of the initial estimates of almost all economic statistics. When the data flip, the Fed will flip too. The only question is timing.”

Markets appeared to be pricing in a slim chance of a cut in May, but most bets were now pushed forward to June or July.

In Treasury markets, yields had been slightly higher before Friday’s inflation data and they were unmoved following the data, with the yield on the rate-sensitive two-year Treasury at 4.63%.

The dollar, meanwhile, gained 0.1% against a basket of rival currencies. U.S. markets were closed Friday.

Preview

Economic Data

Monday: S&P U.S. manufacturing PMI (final), Construction spending, ISM manufacturing
Tuesday: Factory orders, Job openings, Fed Governor Michelle Bowman speaks, U.S. auto sales
Wednesday: ADP employment, Fed Chair Jerome Powell speaks
Thursday: Initial jobless claims, U.S. trade balance, Philadelphia Fed President Patrick Harker speaks
Friday: U.S. nonfarm payrolls, U.S. unemployment rate, Consumer credit

Earnings

Monday: BlackRock Municipal Income Trust
Tuesday: Dave & Buster’s
Wednesday: Exxon Mobil
Thursday: Simply Good Foods Co
Friday: Byrna Technologies

An Impressive Track Record

Getting in Early

The Harbor Capital Appreciation Fund (HACAX) soared last year with a return of over 50%, doubling the performance of the S&P 500.

The fund is already up over 15% this year.

The team behind the fund points to buying growth stocks early as the key to those gains. Microsoft (MSFT), Amazon (AMZN), and NVIDIA (NVDA) alone make up over 20% of the portfolio.

Meta (META) and Eli Lilly (LLY) have also boosted the fund, with Meta tripling and Eli Lilly doubling in 2023.

Snacking On Chips

The Harbor fund team is strategic in how it adds positions. A managing director explained their method: starting with smaller positions and building them up over time.

Over the last few years, HACAX has been buffing up its semiconductor holdings. Broadcom (AVGO) was added in 2022 and Advanced Micro Devices (AMD) in 2023.

Chip companies currently make up 3 of the fund’s top 10 holdings.

More Than a One-Trick Pony

Big tech names dominate the Harbor Capital Appreciation Fund, but there are other sectors represented.

A managing director for the fund told CNBC that the fund’s three main areas of focus are consumer-oriented stocks, technology, and healthcare.

Visa (V) and Mastercard (MA) diversify the fund with exposure to consumer spending. The stocks have been long-term winners.

The fund might have a difficult time matching returns from 2023, but the team behind HACAX is confident in their method.

Which stock will have the best returns in 2024?

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Keep Your AI on the Prize

Changing the Game

Generative AI is spreading like wildfire, and companies across many sectors are adopting the technology.

Retail companies in particular are investing big bucks in AI in hopes of increasing efficiency and profits.

Retailers have been using AI tech for years, but according to McKinsey research, the adoption of generative AI could add up to $660 billion annually in productivity gains to the sector.

Driving Productivity

While AI should certainly increase revenues, experts believe adopting the tech will ultimately help profits.

Retailers are expected to begin implementing the technology into more labor-intensive aspects of their businesses like marketing and customer service, saving on labor costs and increasing productivity.

UBS analyst Jay Coles does caution investors to expect major positive effects of AI to show in the next 10 years, rather than the next two.

Who Stands to Benefit?

November 2023 marked the anniversary of the release of ChatGPT. Over that year, the 15 stocks in the S&P 500 with the most exposure to AI outperformed the rest of the index by 66%, according to David Schick of Stifel Think Tank Group.

Nike (NKE), Lululemon (LULU), and Walmart (WMT) are all stocks that could benefit from scaling AI integration quickly, according to TD Cowen.

There’s no doubt that we’re in the midst of an AI revolution. Investors looking for companies that could benefit from the movement can add these names to their list.

Which stock do you think will outperform over the next 12 months?

Covering Your Bases

Exceeding Expectations

In February, Goldman Sachs (GS) lifted its year-end target for the S&P 500 to 5,200. The benchmark index has already surpassed that expectation.

Now the investment bank is offering investors various scenarios that could play out over the rest of the year, and some advice on preparing for the worst.

The Good

The first scenario predicts that the index could continue its climb and close out 2024 at 5,800. For this to happen, Goldman says interest rates would have to fall while the economy remained strong. Should this scenario come to fruition, a wide-ranging group of stocks outside the AI sector could see a jump in value.

Another scenario considers the possibility that the index could balloon to 6,000 by year’s end. This would mean that the current lofty expectations for AI stocks like Nvidia (NVDA) would prove to be accurate.

The Bad

On the downside, the bank is preparing for the possibility that the index could fall to 4,500. This would most likely happen as a result of sales growth for the Magnificent 7 companies coming up short of expectations.

The last, and perhaps most dire scenario, is that the S&P 500 closes the year at 4,500 and the economy is at risk of recession. This would be fueled by slow or non-existent growth contributing to investor anxiety.

For investors looking to hedge against a pullback, Goldman suggests moving funds into some defensive stocks like AT&T (T), Duke Energy (DUK), and Walmart (WMT).