Gains in the U.S. stock market this year have been concentrated among a handful of immensely valuable tech companies. Technology and communications services stocks in the S&P 500 are up more than 30 percent this year to date. Consumer discretionary stocks are up this year as well — by around 18 percent — but all of the other eight S&P 500 sectors are down. Stocks in the energy sector are collectively down more than 10 percent.
Of the S&P 500’s 10.3 percent total return including dividends so far this year, 9.99 percentage points owe to just eight stocks, two of which represent parts of Alphabet, Google’s parent, “leaving a mere 0.3 percent return for the entire rest of the market,” JoAnne Feeney, a portfolio manager at Advisors Capital Management in Ridgewood, N.J., wrote heading into the Memorial Day weekend.
What is the hypernarrow stock market advance telling us about prospects for the economy, and should we pay attention? I can tell a pessimistic story and an optimistic story, but I’m going to lean into the optimism.
The pessimistic take is that it’s unhealthy for a market — and an economy — when all the good news is concentrated in a handful of sectors. “It can reflect overcrowding in one area and uncertainty around the broader economy in others,” Mona Mahajan, a senior investment strategist at the brokerage firm Edward Jones, wrote last week.
Stock prices reflect investors’ expectations about corporate profits, and profits are tied to the performance of the economy. So there should be — and is — a positive correlation between the stock market and the economic outlook. But the performance of particular sectors also reflects factors that are unique to those sectors: oil prices, interest rates, tech breakthroughs and so on.
The artificial intelligence craze is the most likely explanation for the tech sector’s outperformance this year. That seems like a slender reed on which to build a broad economic expansion.
But it’s not so unusual for one or two sectors to power an expansion. In 1980, seven of the top 10 S&P 500 members by market cap were in energy, according to data compiled by Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.
Assume for the moment that only the tech sector benefits from A.I. Diversified investors still benefit from the A.I. craze because a big portion of their portfolios is in tech stocks. The people who get hired to work on A.I. also benefit. Some of them may transition into tech from sectors that aren’t doing as well. Meanwhile, rising stock prices induce more consumer spending.
The S&P 500 index is capitalization-weighted, meaning that the most valuable companies carry more weight. A change of 1 percent in the price of Apple shares affects the index more than the same change in the price of the 500th-most-valuable index member. You can make a case that the economy is also weighted, although not by market value: The performance of a big, powerful sector such as tech matters more to gross domestic product and even employment than the performance of, say, the materials sector.
Even that understates the potential gains from A.I. and other tech advances. Economic historians point out that while companies on the leading edge of technology production score the early gains, over the long term most of the benefits go to the customers. Take Microsoft’s Excel spreadsheet program. Sure, it’s been a cash cow for Microsoft for decades. But the gains to Microsoft and its investors aren’t as big as the gains to people all over the world who use Excel to run their businesses more effectively.
Artificial intelligence is likely to turn out the same way as Excel. In fact, we’re already seeing it. Early adopters are finding clever uses for A.I. tools such as ChatGPT, including memo drafting, language translation, software code generation and debugging. Deutsche Bank strategists recently compared A.I. with automobiles, which created jobs in not just auto production but also dealerships, road construction, tourism and the development of the suburbs.
I worry about the downsides of A.I. I also worry that the U.S. economy is headed for a recession, if it isn’t in one already. In spite of those concerns, I think the narrowness of the stock market’s rise — so heavily driven by a handful of tech giants — isn’t the problem that many strategists make it out to be.
“Investor exuberance has some solid foundations,” Feeney wrote. I think she’s right.
Elsewhere: The Minimum Wage Is Pretty Minimal
The buying power of the federal minimum wage is at its lowest point since December 1949, according to a calculation by the Economic Policy Institute. The wage floor has been stuck at $7.25 an hour since July 2009, the longest period without change in its history. Its buying power has been eroded by inflation. In December 1949, the minimum wage was 40 cents an hour, or $4.48 in April 2023 dollars. It rose to 75 cents the next month, which is $8.44 in April 2023 dollars. At its peak value, in February 1968, the minimum wage was worth $12.44 in April 2023 dollars.
To adjust for inflation, the Economic Policy Institute splices together several price indexes to make up for the fact that the CPI-U — the price index for all urban consumers — isn’t defined consistently over time. Today’s minimum wage would appear even lower, going strictly by the CPI-U, which is what the Bureau of Labor Statistics uses in its online inflation calculator.
Quote of the Day
“A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects.”
— Robert Heinlein, “Time Enough for Love” (1973)
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June 01, 2023 at 02:00AM
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Opinion | Two Ways of Looking at the Stock Market's Rise - The New York Times
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