The momentum from the October rally in both the bond and stock markets slowed last week as bargains started to disappear and no new catalyst surfaced to drive prices materially higher. 10-year Treasury yields settled around 4.5% after briefly touching 5% in late October. Stocks, which were oversold at the end of October and benefited both from momentum shifts and the return of stock buybacks post earnings reports, also saw gains moderate. In the end, valuation always matters.
This week is unlikely to be a busy one with a single exception, Nvidia’s# earnings report due tomorrow after the close. But before discussing that, I have to note the big news of the weekend, the firing of Sam Altman as the CEO of OpenAI. Some, perhaps many, of you have never heard of Sam Altman. OpenAI is a company started roughly a decade ago, as a non-profit, open-sourced entity to accelerate the development of artificial intelligence software. Mr. Altman was one of its co-founders and served as both CEO and the company’s most visible public face. Late last year, it created a for-profit arm and released ChatGPT, a software program that literally created what we call the “Magnificent Seven” on Wall Street, seven stocks at the top of the S&P that have driven the stock market ahead in 2023. What ChatGPT did was to scrape data across anointed sources on the Internet to help create anything from book reports to software code. It could mimic your style, thus allowing my report to be different from yours. AI wasn’t all about book reports or term papers, it could facilitate the writing of newspaper obituaries or even software code. The more sophisticated the question, the more accurate the answer.
Needless to say, ChatGPT and its derivatives were an exciting breakthrough. It helped to speed development of thousands of customer service applications. Its core was soon imbedded in software updates. Microsoft# quickly bought a 49% stake once OpenAI decided to commercialize a for-profit arm. A company that early in 2022 was worth well under $10 billion is now approaching $100 billion.
The benefits of OpenAI and ChatGPT are obvious, but so are the risks. Computers may be smart and they are only going to get smarter, but not all questions have a single answer. Moreover, the best answer statistically may not be the best answer morally. Mr. Altman and the Board of OpenAI evidently disagreed over how the company was balancing profit opportunities with risk. His firing Friday stunned Silicon Valley. The public confusion was intensified by the opaque explanations given by OpenAI’s Board and the fact that the company now has had 3 CEOs in a span of 4 days.
Besides the fascination associated with the weekend news, sure to soon be the subject of a book and a movie, what are the real implications for the technology industry and even the world? The answer is probably less than you might think. The genie is out of the bottle. Whether it be OpenAI, Microsoft, which immediately hired Mr. Altman and one of his co-founders to lead its own AI efforts, or another company, the world will continue to race forward with the development of generative AI applications. The world, from you and I as individuals to the White House and other world capitals, understands the risks posed by this new technology. How to control the risks without impeding the positive side is a huge problem to be flushed out over the next many years. It won’t be useful for a broad set of U.S. limitations if China, Russia and others use it nefariously. But that’s a story for another day.
This all ties into Nvidia because Nvidia makes the chips most used to execute the software instructions. A simple request requires computers to search through millions of data points to offer a solution. That requires immense computing power and speed. Today, Nvidia’s chips are the best in the world. Wrapped around the hardware are sets of software instructions that accelerate the chip’s speed and efficiency. Today, it has a clear lead. As the world races forward and corporations strive to separate themselves from others, demand for its chips are off the wall. Its chips are so powerful and so much better than those made elsewhere that the U.S. government has banned the sale of leading edge chips to China. At the moment, demand elsewhere overwhelms Nvidia’s ability to satisfy it. Therefore, the Chinese ban isn’t slowing sales yet, but supply won’t overwhelm demand forever. In addition, it is unlikely Nvidia will have the Generative AI market all to itself forever. With all this said, expectations surrounding its earnings report tomorrow after the close are sky high. That’s a story that will play out in markets Wednesday and beyond. It will also likely have echo effects on many leading tech names including many high-profile semiconductor and software companies. As noted earlier, Nvidia’s earnings reports earlier this year were the thrust that pushed the Magnificent Seven forward. Reaction Wednesday and beyond could determine the near-term course for the whole group. Stay tuned. Right now, there is little else for investors to focus on this week.
Given it is a big holiday week, there will be a Comment Wednesday but none of Friday. The overstuffed among us will sleep late. Those up early will be chasing Black Friday bargains. No need to read a market letter after a no-news Thursday.
Today, Bo Derek is 67. President Biden turns 81. I am confident Donald Trump will have a word or two to say about that before the day is over.
James M. Meyer, CFA 610-260-2220