Grey Ledge Advisors Summary and Outlook 2024

As the year comes to an end, we welcome 2024 and would like to share our current market views and present an outlook for the year ahead. There is no doubt that 2023 has been a year of immense events in areas such as Innovations (AI and GLP drugs), Markets, Interest Rates, and the Federal Reserve. We don’t expect 2024 to be a lackluster year either. Below we opine in detail on the above factors with respect to our view on their future expectations:


AI (Artificial Intelligence)

We still can’t wrap our heads around the fact that Sam Altman CEO of OpenAI was overlooked as Time person of the year in favor of Taylor Swift. Although AI wasn’t invented in 2023, it was widely disseminated to the general public in the form of a chatbot by OpenAI, featuring their Large Language Model (LLM) known as ChatGPT. This was surprising to everyone, from professionals to amateurs. AI was dismissed before ChatGPT given the previous false starts of the technology and understanding and doing the work as, at best, average.

The first version of ChatGPT 3.5 could do the following:

  • Write essays
  • Build Excel formulas
  • Draft poems and movie scripts
  • Research topics and summarize content
  • Write code
  • Plan a holiday

The next iteration, GPT 4 (OpenAI ships products quickly, that is one reason the CEO was ousted) went one step further:

  • Ace most of a standardized test
  • Build basic websites with no code written by the user
  • Knows 26 languages
  • Now allows you to input not only text but pictures and various kinds of files
  • Understand input of 25,000 characters instead of 4,000 characters

As this became clear, investors rushed in, adding a trillion-dollars in market capitalization to Microsoft and Nvidia, with the latter entering the trillion-dollar club. Significant investments were made in other semiconductor and software companies as well.

GLP-1 Weight Loss drugs

When FT’s person of the year 2023 was awarded to Lars Fruergaard Jørgensen, the chief executive of Danish firm behind Ozempic & Wegovy, some of our faith in humanity was restored. The advent of weight loss drugs is such a breakthrough moment in healthcare that there is a shortage of drugs even after almost one year of them being widely prescribed.

After 32 years in the making, the appetite-reducing hormone GLP-1’s version, semaglutide, was first approved for diabetes patients in 2009. In 2015, a weight loss drug was approved, but it only facilitated a 5% reduction in weight. It took scientists another 6 years and hundreds of millions of dollars in spending on clinical trials for current versions of the drugs to be approved. 2023 became the year when it became more than a celebrity fad drug with it going viral on Tik-Tok and Instagram with 1.3B mentions. The result was that two companies’ (Novo-Nordisk & Eli Lilly’s) innovation, primarily used for diabetes, changed the health industry’s landscape in such a way that its ramification will hit the lives of many people and companies.

The companies claim that along with 15%+ weight loss potential, there is a 20% reduction in heart attacks in overweight patients. A Greyledge Advisor’s team member, a user of the drug, explained the benefits go beyond weight loss. Hypertension, fatty liver, and other health vital signs have improved drastically after taking Ozempic for more than five months.

While investing in innovations might seem obvious, in reality, similar to other aspects of investing, it is more challenging. A few examples below summarize historical innovations and the wealth multipliers that went along with them:

  1. Amazon (E-Commerce, Internet): As a leader in e-commerce, Amazon has significantly outgrown the market cap of many other network providers (ATT & Verizon). Market Cap: Approximately $1 trillion.
  2. Coca-Cola (Beverage, Refrigeration): Coca-Cola, leveraging refrigeration technology, has a market cap that surpasses most other companies in the refrigeration industry. Market Cap: Approximately $250 billion.
  3. Facebook (Meta) (Social Media, Smartphone): Facebook has capitalized on the smartphone (Nokia, blackberry) revolution. Market Cap: Approximately $900 billion.
  4. ExxonMobil (Oil and Gas, Automobile): Benefited from the automobile’s popularity. Market Cap: Approximately $400 billion.
  5. Booking.com (Online Booking, Air Travel): Capitalized on the convenience of air travel. Market Cap: Approximately $122 billion (larger than all US air travel companies combined)
  6. Microsoft (Software, Personal Computing): A major software provider for personal computers. Market Cap: Approximately $2.77 trillion. Larger than all of the P.C. makers combined.

We believe the big winners from AI and GLP drugs are yet to be decided, apart from the first derivative winners, which are obvious.

While we believe there will be enormous productivity gains along with new functions emerging, the risk of Cyber-attacks on the cloud space are higher than ever. AI makes it easier for hackers to crack redundant security systems and gain access to computer and cloud networks for a ransom.

As recently as November 2023 the Industrial and Commercial Bank of China (ICBC) was hacked and had to pay ransom to regain access to email and other systems. This attack made headlines as it disrupted the most liquid treasury market in the world, which is essential for the financial plumbing that provides liquidity to institutions worldwide.

Number of incidents in 2023: 1,404
Number of breached records in 2023:
Source: itgovernance.co.uk 5th Dec,23

Cybersecurity companies, already growing at 25% year-on-year, will likely continue at this pace as companies scramble to prepare for new threats. While there will be other winners as AI develops, cybersecurity stocks are our special focus as they will benefit from a surge of companies scrambling to protect their data and networks.

The second derivative winners around the weight loss arena will be hard to predict, but recent trends show apparel, leisure brands and fitness focused companies already showing gains as traction of weight loss drugs increases. There may be more losers than winners from this transition as appetite for snacking and alcohol decreases, directly affecting loyal customers of fast-food chains, snacking companies and spirits producers.

Markets, Interest Rates & Federal Reserve

Markets today stand near all-time highs and interest rates are significantly lower after hitting a high of around 5% (10-year Treasury note) in October 2023. Markets often climb a wall worry and seem to be doing the same thing now. We all read in the news headlines that there are plenty of things to worry about. The S&P 500 is up 24% for the year after falling 19% in 2023. There were significant previous headwinds predicted which ended up not happening- e.g. the economy falling into recession. Other events could have caused a significant market downturn but didn’t – think the collapse of Silicon Valley Bank and the shotgun marriage of one the oldest financial institution in the world – Credit Suisse being absorbed by UBS, essentially dissolving the former.

Inflation halved in July, giving a significant boost to the market, coinciding with the Federal Reserve pausing interest rate hikes and leaving things on hold ever since. We witnessed inflation reaccelerating again in October along with crude Oil crossing $97/barrel as Hamas attacked Israel. As December arrived inflation cooled and is heading to the 2% level, while oil is below $70/barrel. The price of oil spiraling out of control due to the conflict in middle east has not yet materialized.

There was a meaningful change in the tone of Federal Reserve chairman Powell’s choice of words from December 1st to December 13th. Inflation numbers cooled, signaling a retreat from the hawkish stance stressing the need for “a significant period of tightening is needed” to “we are looking to cut interest rates in 2024”. This fueled a huge rally in the bond market as well as the equity markets as it sent a signal possibly drawing the curtains on tight liquidity.

While the exact reasons for the Federal Reserve’s change in stance remain unknown, speculation suggests that the Chairman did not want to risk a recession similar to what Germany is experiencing, especially as the U.S. enters an election year.

In our view, this significantly changes the dynamics for risk assets in 2024 from what has been to what could be. We agree in principle with the motto “never fight the Fed”. Recent robust growth of the economy (4.5% in Q3 2023) is expected to slow to 1.5% next year, side stepping any expected weakness as projected by the IMF.

The record unemployment rate coupled with continued federal spending and loosening of financial conditions as suggested by the Fed will play a significant role in returns for the new year.

Barring any financial accidents, we expect interest rates to fall further next year, thereby boosting both the income and capital returns of bond portfolios.

The stock market would benefit from a broadening of the rally with all other sectors joining the magnificent 7 stocks, which were the main driver of the returns in 2023.

Risks to above projections:

  1. All good news about the easing of financial conditions may have already been priced into the market and any negative inflation surprises would be harmful to the rally.
  2. Spending by congress could be jeopardized in January as the new speaker of the house presses for border security in exchange for more spending.
  3. Commodity prices start to accelerate once again.
  4. Growth of US economy slows below 1% as previous tightening of financial conditions start to weigh in with lagged effects.

As we look towards 2024, it’s essential for investors to approach the market with a balanced perspective of caution and proactive strategy. Monitoring shifts in monetary policy, keeping abreast of geopolitical changes, and understanding macroeconomic movements are critical for recognizing both risks and potential return areas. The general market outlook appears promising but being alert and flexible will be important in making the most out of the markets.

Helping our clients achieve their financial goals