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A(I) Silver Lining in the Market

A(I) Silver Lining in the Market

June 14, 2023

Key Takeaways

  • Excitement over AI has boosted markets in 2023 despite inflation and pervasive economic pessimism. A small handful of AI-related companies are primarily responsible for strong year-to-date performance for the broad stock market.
  • Demand for AI technologies is seemingly robust and broad-based. Corporations and individuals are finding creative new applications for AI technology at the workplace. AI technology may dramatically improve worker productivity but also gives rise to a host of privacy, security, and ethical concerns.
  • The forward-looking nature of the market indicates expectations for continued AI demand growth and exponential adoption of AI technology at all levels of society.

Capital markets are famously resilient and are eternally searching for a silver lining, and 2023 provides a perfect example of this point. U.S. Stocks and bonds have surpassed all projections so far in 2023, delivering positive returns of +9.65% and +2.46%, 1 respectively, despite stubborn inflation, a determinedly hawkish Federal Reserve, and record-high levels of pessimism on the economy. 2 What glimmers of hope, then, have markets found to justify these robust gains?

The answer, it seems, is artificial intelligence (AI). A flurry of excitement over machine learning and natural language processing tools has propelled shares of large tech companies, and other firms with close ties to the technology. These “AI stocks” have been enormously impactful on the domestic stock market in 2023, to the extent that without them, the return for the S&P 500 would be negative.

Are the AI stock returns justified?

It is difficult to say. Some companies recently reported record-breaking revenue and profits thanks to surging demand for AI-related graphics processing units (GPUs). Other companies with sizeable AI research and development pipelines have also posted similarly strong financial results, adding fuel to the brewing AI enthusiasm. Still, recent AI stock performance appears to stem primarily from investors’ excitement around new AI technology, and only secondarily from underlying company fundamentals.

There are still many unanswered questions regarding the future of AI, and societal concerns associated with the integration of AI technologies into our everyday lives are abundant. Will AI be a destructive force for workers as it makes certain existing jobs obsolete, or will AI have a net positive impact thanks to greater employee productivity and the creation of new fields of employment? Will AI lead to greater income inequality? Will biases in AI algorithms lead to greater discrimination and misinformation to the public? The fact that many AI technologies collect and analyze large amounts of data also gives rise to privacy and security concerns. These concerns are likely to come to the forefront of policymakers’ agendas in the future as they work to build legal and regulatory frameworks that can govern AI technologies.

 

With all that said, it doesn’t take much research to understand why the public is so excited about AI technology. A brief demonstration of new AI tools is enough to show that generative AI technologies have grown incredibly powerful and hold enormous potential to transform society in ways we can’t yet imagine. The best example of an AI technology that is already having huge implications on various industries and professions is the natural language processing tool ChatGPT. AI firm OpenAI launched ChatGPT on November 30, 2022, and its active user base grew to 100 million by January 2023 (just two months later!), making it the fastest-growing app of all time. Software firms have begun using the app to create complex new software applications more quickly; travel-planning firms are using the technology to provide customers with the experience of talking to a personal travel agent, and companies of all industries have quickly begun shifting customer services functions to the technology. At the individual level, employees in various roles are tinkering with ChatGPT’s capabilities, increasingly using the technology for content creation, including drafting emails, blogs, and even social media posts.

An Introduction to Natural Language Processing Tools

To give you a sense of the capabilities of natural language processing tools, we have used ChatGPT to draft the remainder of this communication in a Q&A format. Below, you will see both the prompts we input into the application as well as ChatGPT’s responses. Be assured that we did not edit ChatGPT’s responses in any way, but we did fact check the responses to ensure accuracy (since it and other natural language processing tools are prone to giving false information).

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Can you explain how natural language processing tools work in simple terms and in fewer than 200 words?

ChatGPT: Certainly! Natural Language Processing (NLP) tools help computers understand human language. They break down sentences into smaller parts like words, figure out the type of each word (noun, verb, etc.), and find important information like names and places. They analyze the sentence structure to understand how the words relate to each other. NLP tools also try to understand the meaning and sentiment of the text, whether it's positive, negative, or neutral. These tools learn from many examples to recognize patterns and rules in language. They use this knowledge to make predictions and perform tasks like reading documents, answering questions, translating languages, and having conversations. NLP tools are like language detectives for computers, helping them understand what we're saying and enabling more natural interactions between humans and machines.


Is natural language processing the only facet of AI that holds transformative potential for society (please keep the response to fewer than 200 words)?

ChatGPT: No, natural language processing (NLP) is not the sole facet of AI with transformative potential. AI encompasses a range of technologies like computer vision, machine learning, robotics, and deep learning. Computer vision enables computers to understand visual information, while machine learning facilitates data-driven decision-making. Robotics and automation enhance efficiency and accuracy in various industries. Deep learning enables complex pattern recognition, and reinforcement learning empowers agents to make decisions through trial and error. Predictive analytics leverages AI techniques for data-driven insights. These facets, alongside NLP, collectively contribute to the transformative power of AI across industries and society.

What advice would you give to our firm's (SageView's) clients regarding investing as generative AI technologies emerge? Some of our clients are afraid to miss out on AI-related investment returns, while others think AI stocks may be in a bubble. We want to advocate for diversification and the benefits of working with a qualified financial planner.

ChatGPT:
Dear SageView Clients,

As generative AI technologies continue to emerge, we understand that investing in this space can evoke mixed emotions. Some clients may fear missing out on AI-related investment returns, while others may have concerns about potential bubbles in AI stocks. At SageView, we would like to provide you with the following advice and insights:

  1. Embrace Diversification: Diversification is a fundamental principle of investing. It helps manage risk by spreading your investments across various asset classes and sectors. While AI holds significant potential, we recommend maintaining a well-diversified portfolio that includes exposure to traditional sectors alongside AI-related investments. This approach allows you to benefit from the growth potential of AI while mitigating risk.

  2. Take a Long-Term Perspective: Investing in emerging technologies like generative AI requires a long-term perspective. It's important to focus on the underlying fundamentals of the companies you invest in, rather than short-term market fluctuations. Generative AI technologies are still evolving, and their full impact may take time to materialize. By staying invested for the long haul, you can better capture the potential rewards while managing short-term market volatility.

  3. Work with a qualified adviser: A qualified adviser can play a crucial role in guiding your investment decisions. They can help you assess your risk tolerance, set realistic financial goals, and develop a customized investment strategy that aligns with your needs. At SageView, our team of experienced advisers is dedicated to providing personalized advice and comprehensive financial planning services to help you navigate the complexities of investing in generative AI technologies.

  4. Stay Informed: Educating yourself about the potential benefits and risks of generative AI technologies is essential. Our team is committed to keeping you informed about the latest developments in the AI space and providing research and analysis to help you make informed investment decisions. We encourage you to stay engaged, ask questions, and seek a deeper understanding of the opportunities and challenges presented by generative AI.

We firmly believe that a diversified portfolio, a long-term perspective, and the guidance of a qualified adviser are key components of a successful investment strategy. By working together, we can help you navigate the emerging landscape of generative AI technologies and seize the potential opportunities while managing risks effectively.

Please don't hesitate to reach out to us for further discussions, personalized advice, or any concerns you may have regarding investing in generative AI technologies or any other financial matters. We are here to support you on your investment journey.

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[This is the real Todd again] We sincerely hope you enjoyed this monthly update, and as the “robot” indicated, please feel free to reach out to us with any questions.

 

1 Source: Morningstar. Returns as of 5/31/2023. Stock returns based on the S&P 500 Index, and bond returns based on the Bloomberg US Aggregate Bond Index.

2 Source: April 2023 CNBC All-America Economic Survey, which indicated 69% of Americans are pessimistic about the US economy.


Information is provided by SageView and written by Todd Stewart, a non-affiliate of Cetera Advisors LLC.

The views stated in this blog are not necessarily the opinion of Cetera Advisor Networks LLC or Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable═ż however, their accuracy or completeness cannot be guaranteed.

The views stated in this piece are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.

 A diversified portfolio does not assure a profit or protect against loss in a declining market.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

A diversified portfolio does not assure a profit or protect against loss in a declining market.

The Bloomberg U.S. Aggregate Total Return Value Unhedged, also known as ‘Bloomberg U.S. Aggregate Bond Index’ formerly known as the ‘Barclays Capital U.S. Aggregate Bond Index’, and prior to that, ‘Lehman Aggregate Bond Index,’ is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

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