Daily Commentary

MarketMinder’s View: Before we begin, this piece mentions a handful of companies, so a friendly reminder that MarketMinder doesn’t make individual security recommendations. Their mention is coincident to highlighting a broader theme. Namely, the hype around Artificial Intelligence (AI) has cooled in recent months as the technology faces sizable roadblocks, including government regulation and mounting questions about the existing technology’s capabilities. Thus, AI chatter has changed tune. “Drastic warnings about AI posing an existential threat to humanity or taking everyone’s jobs have mostly disappeared, replaced by technical conversations about how to cajole chatbots into helping summarize insurance policies or handle customer service calls … While money keeps pouring into AI, very few companies are turning a profit on the tech, which remains hugely expensive to build and run.” This is all largely consistent with what we wrote when ChatGPT went mainstream over a year ago. At that time, headlines heralded how AI would massively disrupt economies and humans’ way of life (though similar technology has existed for decades), touting the possibility of huge investment returns. That may be so in the very long term, but the large language models and other forms of generative AI getting all the attention don’t fit the bill. Rather, they were the fruit of years of research and investment, the culmination of a period in which many pureplay AI firms had already gone through a full Silicon Valley hype cycle and failed. That left the large growth-oriented Tech firms with diverse enough revenue streams to subsidize big server costs—as well as those making the chips these powerful machines run on—as the likeliest winners, which has largely borne out. Now, most see AI as a way to help big companies cut costs and become more efficient—far from the paradigm-shifting tech we saw touted not long ago. We think this provides a valuable lesson for investors: Before chasing heat and diving into a widely hyped investment, ask yourself a few questions. How far out into the future are the potential returns, and how can you form a rational estimate of the probability this one company out of scores of others will be among the winners? Is it possible the hype and expected returns are overstated? Most importantly, does the tradeoff between risk and potential return fit into my long-term investment goals and needs? This mindset can help you avoid getting dragged into the temptations of a hype cycle.

MarketMinder’s View: This piece explores the main component keeping widely watched inflation gauges elevated: rents. Housing and shelter costs make up around 16% and 33% of the personal consumption expenditures (PCE) price index and consumer price index (CPI) (per the Bureau of Economic Analysis and Bureau of Labor Statistics), respectively, giving them a disproportionate influence on headline readings. While price increases for other components like food, healthcare and transportation have largely moderated from 2022’s highs, housing supply shortages have kept rental cost increases relatively high—elongating inflation’s path down. But as this piece shows, the trend isn’t uniform across the US. “In the Northeast and Midwest, rental inflation is not even a quarter of the way back down from the peak to pre-pandemic levels. In the South and the West it’s more than half-way and almost four-fifths of the way there, respectively.” Perhaps frustrating for some, but we see a silver lining here: High prices are signals for builders to ramp up supply, particularly in places with fewer regulatory barriers to doing so. See the article’s Phoenix, Arizona example. Rental inflation fell from 18% y/y in 2022 to just 3% today after high prices sparked a construction boom that replenished supply. The other good news is that “gauges of market rents on new leases have already returned to prepandemic inflation rates.” Rental inflation tends to lag other components by about 18 months due to the nature of long-term leases, so it may be a while before this improvement registers in CPI, but there is mounting evidence the dislocations of the past few years are evening out.

MarketMinder’s View: The latest National Association of Realtors data showed sales of previously owned homes—most of the housing market—fell -4.3% m/m in March, despite inventory (existing homes listed for sale) rising. Why? “This sales count is based on closings from contracts likely signed in January and February. Mortgage rates stayed lower in January, in the mid 6%-range on the popular 30-year fixed loan. They then shot higher in February.” The average US 30-year fixed mortgage rate rose from 6.63% to 6.94% in February (per Freddie Mac data). Not a huge jump, but seemingly enough to cool homebuyer demand. Meanwhile, the inventory figures are as of March’s end, so there is a temporal mismatch. We think this highlights a couple things for investors: One, borrowing costs’ powerful influence on housing activity. US mortgage rates started jumping at 2022’s start, and in turn, existing home sales fell -17.8% and -18.7% in 2022 and 2023, respectively. Which brings us to our second point: Don’t overrate residential real estate’s impact. Despite the major housing slowdown over the past two years, GDP has grown and even accelerated in last year’s second half. Residential real estate contributes just 3 – 5% of GDP, so its headwinds and tailwinds are incremental to overall growth. Oh, and there is mounting evidence prior headwinds are turning to tailwinds, as high prices and supply shortages are incentivizing construction.