Bob’s Journal for 2/29

Artificial Intelligence Stocks Lead the Markets

Stocks in general have had solid returns since November 2022, but artificial intelligence (AI) stocks are responsible for most of the returns of the major indexes.

There are eight exchange-traded funds (ETFs) with investment strategies related to AI, and 67 stocks in the S&P 500 are in at least one of those ETFs, according to Bespoke Investment Group.

AI has dominated the headlines and markets since November 30, 2022, when ChatGPT first was released to the public.

Since that date, according to Bespoke, the 67 AI stocks are up 45.3% through Feb. 16. The rest of the S&P 500 has a total return of 9.2% during the same period.

The median return for the AI stocks during the period is 33.9%, while the median return for the rest of the index is 6.0%.

But the rest of the market might be starting to close the gap.

So far in 2024, the AI stocks have an average return of 3.7% and a median return of 3.1%. The rest of the market has an average return of 1.1% and a median return of 0.8%. And in the week ending Feb. 16, the AI stocks had losses of over 1% with many having substantial one-week drops that exceeded the losses in the rest of the stocks in the S&P 500.

The research looks only at the AI-related stocks that are in the S&P 500. The ETFs hold a total of 203 stocks, and only 67 of them are in the S&P 500.

Can You Make Heirs Jump Through Hoops?

You can place conditions on bequests in your will or living trust.

Some people want to leave wealth to their children or others, but they want to tie some strings to the bequests. They want the recipients to accomplish certain acts before they inherit. Or they want the heirs to avoid certain behavior to retain their inheritances.

The rule in most states is that conditions can be imposed on bequests when the conditions are not against public policy or impossible to perform.

In a recent Michigan case, a man had most of his assets in a living trust. His adult daughter would receive a bequest from the living trust after his death, but the terms of the trust required her to meet certain conditions before receiving the inheritance. If she didn’t meet the conditions, the bequest would go to others named in the trust agreement.

Specifically, the man said that within 60 days of his death, the daughter had to inform her son of the identity of his biological father. She also had to take all actions reasonably necessary to provide scientific evidence of the biological father’s identity.

The daughter took no action. The successor trustee, the father’s attorney, waited a year and then filed a petition to have the court declare who should receive the bequest. The other beneficiaries also filed petitions requesting a declaration that the daughter forfeited her interest in the trust.

The daughter said the conditions were unenforceable and impractical.

She knew her son’s father was one of two individuals and didn’t contact either of them. She also was estranged from her son, who was an adult, and didn’t contact him.

The appellate court cited a precedent which stated that conditions on a bequest can be enforceable even when motivated by caprice or malice.

The daughter could have argued that the conditions were impossible or against public policy, but she would have had to do that within 60 days or her father’s death.

Or she could have told her son that his father was one of two individuals and named them. Then, she or her son could have sought genetic testing from the individuals.

The court stressed the difference between difficult and impossible actions, and the conditions in the trust weren’t impossible. A condition that seems unreasonable to the court won’t be voided if it isn’t against public policy.

A person generally has no obligation to leave part of the estate to particular people and is free to distribute the estate as they wish, as long as they are of sound mind.

The daughter might have argued successfully that the father’s conditions were against public policy, because they intruded on her privacy, her son’s and that of the likely fathers.

But she failed to take any action. If she didn’t want to comply with the father’s conditions, within 60 days of her father’s death she should have asked a court to rule they were invalid.

(In re Boutet, 2024 Mich. App. LEXIS 643)

Japan’s Stocks Hit New Record

Japan’s Nikkei Stock Average set a record high on Feb. 21, edging above the previous record set on the last trading day of 1989.

Our Retirement Watch portfolios have had positions in Japanese stocks since early 2023.

Several factors are responsible for the recent rally. Earnings are strong among the major Japanese companies that make up the Nikkei average.

The aggregate earnings of the 225 companies in the index are estimated to be about triple their level of a decade ago.

The higher profits are partly the result of strong economic performance, especially higher exports, by some of the leading companies.

In addition, in recent years the government and some activist shareholders persuaded companies to close or sell underperforming divisions, pay dividends and take other shareholder-friendly actions.

The decline in the yen against most developed country currencies also helped increase exports and allowed companies to raise prices and boost profits. The decline in the yen increased stock returns of U.S.-based investors.

Despite the rise in stock prices, Japanese stocks still sell at reasonable prices.

The price to earnings ratio was around 70 at the last market peak and surged to above 100 during the 1990s despite falling stock prices.

Recently, the price to earnings ratio has been below 20.

I expect Japanese stocks to continue to do well but don’t anticipate a further significant decline in the yen.

The Data

The economy slowed a little in the first half of February, according to the PMI Flash Indexes.

The PMI Services Index declined to 51.3 in mid-February from 52.5 at the end of January.

The PMI Manufacturing Index increased to 51.5 from 50.7.

The combination brought the PMI Composite Index down to 51.4 in mid-February from 52 at the end of January.

The Consumer Confidence Index from The Conference Board fell to 106.7 in February from 110.9 in January. The index previously had increased three consecutive months. Also, January’s level was revised down from an initial reading of 114.8.

Both the current conditions and expectations components of the index declined, but the fall in current conditions was more significant.

Consumer confidence improved among those in the 35 to 54 age group but declined among both older and younger consumers.

Existing home sales increased 3.1% in January after falling 0.8% in December.

January saw the biggest monthly percentage increase in sales since February 2023, and January’s sales level was the highest in five months.

In addition, the median existing home price increased to an all-time high of $379,100.

New home sales rose 1.5% in January after increasing 7.2% in December.

The median sale price of a new home in January was $420,700 and the average sale price was $534,400.

The Dallas Fed Manufacturing Index improved to negative 11.3 in February from negative 27.4 in January, which was an eight-month low.

The Richmond Fed Manufacturing Index also improved to negative 5 in February from negative 15 in January.

Durable goods orders plummeted 6.1% in January, following a 0.3% decrease in December.

But transportation and defense orders accounted for a large part of the January decline. After excluding transportation and defense, which is considered a good measure of business investment, durable goods orders increased 0.1% in January after declining 0.6% in December.

The S&P Corelogic Case-Shiller Home Price Index declined for the second straight month in December. The index fell 0.3% in December after falling 0.2% in November.

Over 12 months, the index was up 6.1% through December (the highest level since November 2022) after being up 5.4% through November.

The FHFA House Price Index increased 0.1% in December following a 0.4% increase in November. Over 12 months, the index was up 6.6% through December and 6.7% through November.

GDP (gross domestic product) grew at an annualized rate of 3.2% in the fourth quarter of 2023, according to the second estimate. That’s a decrease from the 3.3% rate in the initial estimate and the 4.9% growth rate of third-quarter GDP.

New unemployment claims declined by 12,000 to 201,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.862 million from 1.889 million.

The Markets

The S&P 500 rose 2.05% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.03%. The Russell 2000 increased 2.57%. The All-Country World Index (excluding U.S. stocks) added 1.17%. Emerging market equities advanced 0.90%.

Long-term treasuries rose 0.10% for the week. Investment-grade bonds fell 0.25%. Treasury Inflation-Protected Securities (TIPS) dropped 0.15%. High-yield bonds gained 0.17%.

On the currency front, the U.S. dollar lost 0.14%.

Energy-based commodities increased 1.05%. Broader-based commodities rose 0.80%. Gold added 0.23%.

Bob’s News & Updates

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