Exciting New Consumption Themes Drive Leadership in Market and Economy

April 4, 2024

By Mitchell Anthony

Overview

The stock market rallied along with other risk assets in the first quarter of 2024 similar to what was seen in the last quarter of 2023. The rally had narrow leadership and mostly centered on the excitement that is building in several areas of the economy that are seeing eye opening and astonishing innovation. That innovation has turned into strong demand for the products and services in areas of technology or technology enabled industries such as artificial intelligence, cloud computing, digital devices, obesity and weight loss drugs, and autonomous vehicles.

Investors have taken notice of these new consumption themes that center on innovation which have taken control of the US economy and now equity market leadership. The magnificent seven stocks (Figure 2) were responsible for most of the S&P 500’s earnings growth and market appreciation last year, and now we note that the FABULOUS FOUR is responsible for nearly 50% of the S&P 500’s Q1 advance.

Significant advances in artificial intelligence is changing the way people make decisions, search and synthesize data, create work product, and implement strategies. Artificial intelligence has businesses scrambling to buy and implement AI in their offerings and stay competitive. Gemini and Chat GBT are wowing consumers with answers to questions that were difficult to acquire from Google alone. DALL-E’s image generation tool likewise has investors in awe as to how simple it is to create images and draw graphics with verbal commands. Devin a programming AI tool allows coders work to be done without the coder. Drug discovery is being accelerated by artificial intelligence used by Isomorphic Labs that enables elements and compounds to be modeled instantaneously with AI tools.

Autonomous vehicles are moving a step closer to reality. Google’s WAY MO technology (Figure 1) is first in line it would appear for businesses wanting to break into Robo taxi’s. Way Mo is currently operating in Los Angeles, San Francisco, Phoenix, and Austin with an app that can be installed on your phone to call an autonomous taxi. Uber eats is now experimenting delivering meals with Waymo driverless vehicles. (Figure 1)

We’ve also seen an acceleration in cloud computing as endless applications are finding they fit better on a Web server than on a home server or business server and fit into this work from home & work from anywhere philosophy in place in America.

Obesity drugs have come to the spotlight with notable success and have large addressable markets due to changing Medicare regulation. Wegovy & Zepbound (Obesity Drugs) are in the market now and being offered by Eli Lilly and NovoNordisk giving the 40% part of the American population that is obese (figure 5) a solution that is more palatable than most diets. There are also new regulations from Medicare that allow reimbursement and coverage given a diagnosis of obesity and heart disease. Ozempic & Mounjaro are the drugs offered by the same companies for obesity associated with diabetes and are covered under most health plans and Medicare. These drugs have also had amazing success with patients reporting 50% or more weight loss in as little as six months. New players have emerged in attempts to capture share in this lucrative market including Zealand Pharma (DK:ZEAL) – GLP, Viking Therapeutics (US:VKTX) – GLP-1 based (more effective than Mounjaro at weight loss), Madrigal Pharmaceuticals (US:MDGL), and Altimmune (US:ALT).

Travel and leisure is less sexy but still well positioned in the economy with growing demand and some innovation taking place including Airbnb’s experiences and Hilton partnership with AutoCamp, amongst others.

Economic Review Q1 2024

Looking at the broader economy and putting aside the sexy innovative portions of the economy that are really the strong drivers there are other things that are worth noting. It seems that everything is mostly the same as it was all last year! Inflation currently stuck at ~3% after substantial decline in 2023 (figure 3). Economic growth continues to surprise on the strong side. The economy seems to have just enough economic capacity with very little excess. There is some softening occurring in housing as higher risk borrowers lose credit because of the rising rates over the last year. This is mostly a good thing as the fed’s higher rates eliminated rot that was beginning to build in housing. There is still a bit of a crisis going on in commercial real estate that has not hit a bottom. Banks are still overloaded with treasury notes and bonds yielding 1 ½% that has put a lid on bank earnings and stifled their ability to lend aggressively. The direction of consumption is still up for debate as we note that consumers are still accepting higher prices of things that is a bit unexplainable, however retail sales has been flat for nine months and significantly lower if you adjust for inflation. That seems to support a thesis for slower growth ahead as consumers will need to retrench, even though their wealth has risen significantly over the last year and a half as investors returned to risk assets.

The inflationary environment is still too high and will keep interest rates up until it subsides. The economy just isn’t weak enough yet to get inflation down to the fed’s target of 2%. Headwinds will likely prevail until this happens over the next year. The US Economy seems to surprise more to the upside than to the downside. The recent NAPM report showed the first expansion in the manufacturing sector in over a year. (Figure 4) This was unexpected and the Fed stepped back a few more paces after that report.

Financial Market Review

Investors return to risk assets continued in Q1 after a big bounce in markets in 2023. The S&P 500 and NASDAQ are at all-time highs surprising most market strategists who did not believe stocks could make new highs given the level of interest rates and the attractiveness of treasury bills. The leadership in the equity markets was narrow and mostly focused on secular growth names that are benefiting from the exciting themes noted at the beginning of this article. The S&P 500 was up 10.6% in Q1 following a 11.6 % rise in Q4. MACM’s dynamic growth portfolio was up 13.8% in Q1, exceeding the S&P 500 and NASDAQ QQQ in Q1. Large-Cap growth stocks as evidenced by the Russell 1000 growth index advanced 11.3% whereas large-cap value stocks as evidenced by the Russell 1000 value index lagged at 8.9% in Q1. Small Cap Growth stocks returned even lesser with a 7.5% return and small-cap value stocks returned only 2.6% in Q1. Foreign markets underperformed with most of the mature parts of the world working in the financial and industrial sectors and lacking participation in the innovative sexy part of the global economy. Europe as evidenced by the EFA advanced a mere 5.9% and emerging markets as evidenced by the EEM was up even less at 2.2%.

Outside of stocks the returns were even less attractive except for bitcoin that had an amazing quarter advancing over 60%. MACM has yet to invest in bitcoin as the thesis for such an investment centers more on following momentum of a mania rather than fundamental growth.

Treasuries were down 3.8% in Q1 and corporate bonds likewise fell but only .9% in Q1. Real estate was generally soft with REITs losing 1 to 2% in Q1. MACM investors have historically benefited from high exposure to secular growth names like Amazon, Apple, Netflix, Meta, Google, and obviously Nvidia. Apple and United healthcare have been pillars of strength in the portfolio’s performance for the last five years but held back performance in Q1 as some problems have emerged for these superstars.

We remain optimistic…