Market Update: Economic Shifts, AI Boom, and Sustainable Investing

Recently, my family and I had a nice dinner in Culver City after enjoying a day at the beach. Typically, I like to indulge in a glass of wine with my meal, but I couldn’t bring myself to spend $20 on a single beverage.

Yes, Los Angeles is an expensive town in general, but 20 bucks for an okay glass of wine? Really? There is an old saying that the cure for high prices is higher prices. Eventually, people will hit their limit of what they are willing to spend on clothing, new cars and even the tempting glass of wine at dinner.

As someone who nerds out about the economy, I enjoy looking for anecdotal signs that things may be shifting. I always look for clues at shopping malls, restaurants and even when driving on the freeway. I’d have to say that everything seems quieter, especially when compared to last summer.

Last year, everyone indulged in exotic post-Covid vacations, lots of nights out and revenge spending. But now, it seems like we're experiencing the aftermath - a collective hangover. People are taking a step back and asking how much is too much.

Even the Federal Reserve has taken notice of these changes. As the puppeteer of the United States' monetary policy, the Fed's decisions have a significant impact on capital cost and liquidity, directly affecting the stock market's performance.

While fundamentals drive long-term market performance, it's the liquidity, i.e., the actions of the Federal Reserve, that dictate short to intermediate-term performance. So far this year, the market has bounced back from the 2022 bear market when equity prices dropped over 20%.

Over the past year, the Fed has significantly raised interest rates, going from 0% to 5.25%. This rapid increase, the fastest in history, led to both the bond and equity markets falling simultaneously. One problem with the Fed is that they rely on lagging data, making them slow to respond to ground-level changes.

Source: www.truflation.com

Truflation vs. CPI

There are other methods of evaluating inflation that seem to be more accurate than the Fed gauges. One in particular, Truflation, uses thousands of real time inflation indicators to create what they believe is a more accurate representation of inflation.

The Federal Reserve's handling of interest rates over the past couple of years resembles a child playing with a yo-yo. If the current trend continues we may even find ourselves in an environment where deflation is the problem and interest rates will need to be aggressively cut.

AI Fueled Tech Rally

This year has seen a shift in the market. The areas that performed well last year haven't fared as well, signaling a regime change. Big oil and fossil fuel energy companies have been some of the worst performers. Technology on the other hand has been on a tear with the Nasdaq having its best first half of the year since the dot.com saga of the 90’s.

Is it ethical to invest in companies involved with AI? It's safe to say that the AI cat is out of the bag and is here to stay. Will it bring about a utopian future, or will we soon need to answer to robot overlords?

As an optimist, I firmly believe in the positive potential of AI. It has the power to revolutionize industries such as medicine, energy and agriculture, while helping to eradicate diseases, end climate change and lower poverty.

Does Impact Fiduciary invest in AI companies? Absolutely. The technology and communication sectors that represent over 25% of the portfolio, are certainly benefitting from the AI boom, but other industries could reap the rewards. Just like the internet revolutionized productivity across all sectors, AI is likely poised to do the same.

Is AI all hype or is it capable of bringing about real change?  In my humble opinion, it's likely a bit of both. While there will surely be some overhyped companies, we can also expect significant advancements in the field. No one knows for sure. That's why it's crucial to have a well diversified and disciplined investment strategy. By participating in the potential growth and regularly rebalancing our portfolio, we can participate in the upside while minimizing the risk of a painful bubble bursting.

Sustainable Investing and Voting Proxies

Sustainable investing is in the DNA of Impact Fiduciary. We have always focused on investing in companies that are solving some of humanities biggest problems while avoiding ethically challenged industries that are harmful to the world.

When it comes to fighting against climate change every small action counts. That's why we believe in the power of choosing fund companies that vote proxies to push more environmental accountability.

As a shareholder, you have the right to vote on various matters that affect the company you invest in. However, many individuals don't exercise this power because the number of shares they hold may seem insignificant. However, when you combine your shares and voting power with other like-minded investors, you can actually gain substantial influence in shaping the future of publicly traded companies. This is one of the reasons why sustainable investing is such a threat to the status quo.

At Impact Fiduciary, we have partnered with Calvert, an investment firm that pioneered sustainable investing in the 1970’s and today manages over $36 billion of assets. Calvert avoids investing in companies that lack the ability to adapt and contribute positively to society. They steer clear of industries such as fossil fuel energy, weapons manufacturing, tobacco, and other harmful sectors of the market. We are proud to utilize two of Calvert’s funds as core holdings in our portfolio.

This is the essence of “voting with your wallet” and maximizing the Impact of each dollar that you invest!

Thanks for reading!

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Patrick Dinan, and all rights are reserved.