Market Commentary — May 15, 2023

As first-quarter earnings season nears a close, investors have turned to evaluate inflation data and predictions about whether the next Fed move in June will be a pause or another rate hike.

Core inflation, ex-food, and energy were in line with expectations rising 5.5%, but “super core” inflation rose only 0.1% for the month, the lowest reading in nearly 3 years. But the Fed comments post the data were not as dovish as markets had hoped. The market is pricing in a 94% chance of a pause in June, but are investors getting ahead of themselves? We are still nowhere near the Fed’s 2% target.

Whereas wage increases are coming down, pilots at United, Southwest, and American are all demanding management match or beat a labor contract adopted by Delta earlier this year raising pay by 34% over the next four years due to higher inflation. It is very easy to see how those higher wages will get passed on to airline passengers in the form of higher prices, resulting in more inflation. This is what happens when inflation becomes normalized and systemic. Another side effect of inflation is slumping consumer sentiment. U.S. consumer sentiment dropped to a six-month low in May.

Also adding to bearish market sentiment are concerns over talks to raise the U.S. government’s debt ceiling. On Friday, the Congressional Budget Office warned that the United States faced a “significant risk” of defaulting on payment obligations within the first two weeks of June without raising the government’s $31.4 trillion debt ceiling, adding that payment operations will remain uncertain throughout May. And oh yes, all that new debt is going to be at higher interest rates.

The buzz in ETF land is a bunch of Ethereum Futures ETF filings. Grayscale was the first to file, and now Bitwise, Direxion, and Roundhill have each filed for similar products as well. Fund rivals “don’t want to be left out in the cold” if the SEC is forced to take a more permissive approach to crypto ETFs, so they are “piggybacking” on Grayscale’s filing as a template.

Envestnet has launched its first exchange traded funds, a suite of four ActivePassive ETFs that offer a blend of actively and passively managed approaches at lower fees than just active ETFs.

And the Canadian-based ETF issuer Emerge, which lists Cathie Wood’s ETFs on the Toronto exchange, has been hit with a trading ban as it missed its end-of-year filings. The firm’s auditor, BDO Canada LLP, resigned in November and apparently has not yet been replaced. This has resulted in trading bans on Emerge’s 11 funds, including 6 Ark Investment Management-partnered funds.

And no surprise, the new hot thematic category is AI. ETFs tracking robotics and AI have pulled in the most thematic flows YTD. Bloomberg Intelligence predicts AI-focused ETFs could attract close to $35 billion is assets by 2030, and AI technology could cut 12 bps off fund costs. The AUM of US-listed AI/Robotics ETFs is currently near $5 billion. The newest AI ETF entrant, Roundhill’s Generative AI & Technology ETF (CHAT) filed on February 17th, should be effective soon and will be actively managed.

One of ChatGPT’s creators thinks there’s a 50% chance that AI if left unregulated, could end humanity. Pro Tip: Do not bring that up on Mother’s Day!

Speaking of Mother’s Day, hope all the fellow moms out there had an enjoyable Mother’s Day. According to Wikipedia, Mother’s Day is a celebration honoring the mother of the family or mother figures, as well as motherhood, and the influence of mothers in society. Love that definition!

Jane Edmondson
CEO and Co-Founder

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