How capitalism will keep AI from destroying the things we love 🤖
How capitalism will keep AI from destroying the things we love 🤖
Plus a charted review of the macro crosscurrents 🔀
📈 Stocks rallied last week, with the S&P 500 climbing 4% to end at 5,626.02. The index is now up 18% year to date and up 57.3% from its October 12, 2022 closing low of 3,577.03. For more on recent stock market moves, read: September is living up to its reputation 🍂 and The best days in the stock market come at the worst times 📉🚀
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Artificial intelligence (AI) is white hot right now. Companies everywhere are bullish on the promise of taking mountains of data, processing it, and producing cost-effective goods and services that are on par with or better than what could be made by humans.
Some jobs are expected to become obsolete while new jobs are created. And the improved productivity is expected to bolster margins and drive profit growth for companies, which is good news for the stock market.
But all this talk mostly focuses on financial benefits, and it conjures up images of a bleak dystopia where the human touch is gone after its intangible value has been taken for granted.
The good news is that history says emerging technologies don’t mean the end of whatever they were meant to improve on.
“As the ubiquity of technology increases and individuals increase their reliance on technology as they communicate via networks, the value they place on ‘authenticity’ and human connectivity – which can evoke a nostalgic image of a simpler, pre-digital life – is likely to grow,” Goldman Sachs’ Peter Oppenheimer wrote. “This is true across many product categories, including food.”
In a research report exploring AI, Oppenheimer highlights examples of hand-crafted, low-tech, “retro” goods and services that survived technological progress. From his note:
…The growth of artificial immersive entertainment may also boost demand for experiences in the real world. This might reflect the growing popularity of goods and services that are seen as ‘authentic’ or nostalgic. Retro ‘crafts’ are growing in popularity, whether it be the growth reality TV programmes where contestants compete in baking, spelling, sowing or even ballroom dancing competitions.
These fashions are spreading into retail. According to Grand View Research, for example, the market for so-called ‘artisanal’ bakery products was valued globally at $95.13 billion in 2022 and is likely to grow at a compound rate of 5.7% from 2023 to 2030. The focus on sustainability and interest in the past together create new consumer markets. According to research conducted by GlobalData for ThredUP, a US second-hand store, the resale clothes market is growing at 15 times the rate of traditional retail. According to a report by Statistica, as of 2021, 42% of millennials and Gen Z respondents stated that they were likely to shop for second-hand items.
You might assume the broad uptake of the wide array of ridesharing options means demand for modes of transport that you own would fall apart. That’s not been the case. From the note:
A similar trend has emerged in transport with the growth in the ‘sharing’ economy and the growth of cycle, scooter and car sharing. Few would have predicted the steady growth in the bicycle market a decade ago; the global bicycle market was valued at over $64 billion in 2022 and is expected to grow at a compound rate of 9.7% from 2023 to 2030. Perhaps even more striking is how the bicycle is outselling the car. Analysis of 30 European countries by the Confederation of the European Bicycle Industry (CONEBI) and the European Cyclists Federation (ECF) suggests that, at the current trajectory, 10 million more bikes will be sold per year in Europe by 2030, representing a rise of 47% compared with 2019. On this basis, the 30 million bikes sold annually in Europe would be more than double the annual sales of cars.
As the world moves forward, it’s interesting to think about the value consumers place on the past. From the note:
In the 21st century, in a highly digitalised world where almost everyone is connected to the internet and the cutting edge of technology threatens to displace jobs and companies, it is meaningful that one of the biggest companies in Europe is LVMH. This is a company that sells the value of heritage in historic brands. It was formed in 1987 through the merger of two old companies: Louis Vuitton (founded in 1854) and Moet Hennessey, which itself was a merger in 1971 between Moet & Chandon, the champagne producer (founded in 1743) and Hennessey, producer of cognac (founded in 1765). According to its website, the company develops the brands that ‘perfectly encapsulate all that they have embodied for our customers for centuries.
Intangible value is a kind of value. And people are finding it in goods and services that have arguably been improved on.
It’s not easy to explain why we value this stuff. But the point is we do.
And we demand this stuff.
And when enough people demand something, there’ll be businesses to supply that thing. It’s just basic economics and capitalism at work.
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Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
👍 Inflation cools. The Consumer Price Index (CPI) in August was up 2.5% from a year ago, down from the 2.9% rate in July. This was the lowest print since February 2021. Adjusted for food and energy prices, core CPI was up 3.2%, unchanged from the prior month’s rate.
On a month-over-month basis, CPI was up 0.2% as energy prices fell 0.8%%. Core CPI increased by 0.3%.
If you annualize the three-month trend in the monthly figures — a reflection of the short-term trend in prices — CPI rose 1.1% and core CPI climbed 2.1%.
Inflation rates have been hovering near the Federal Reserve’s target rate of 2%, which is why the central bank has been signaling that rate cuts may be around the corner.
For more on inflation and the outlook for monetary policy, read: Inflation: Is the worst behind us? 🎈and Fed Chair Powell: 'The time has come' ⏰
👍 Inflation expectations remain cool. From the New York Fed’s September Survey of Consumer Expectations: “Median inflation expectations at the one- and five-year horizons remained unchanged in August at 3.0% and 2.8%, respectively. Median inflation expectations at the three-year horizon rebounded somewhat from the low July reading, increasing from 2.3% to 2.5%.”
From the University of Michigan’s September Surveys of Consumers: “Year-ahead inflation expectations fell for the fourth straight month, coming in at 2.7%. The current reading is the lowest since December 2020 and is well within the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations were little changed, edging up from 3.0% last month to 3.1% this month. Long-run inflation expectations remain modestly elevated relative to the range of readings seen in the two years pre-pandemic.”
For more on inflation, read: The end of the inflation crisis 🎈and Fed Chair Powell: 'The time has come' ⏰
👍 Consumer vibes improve. From the University of Michigan’s September Surveys of Consumers: “Consumer sentiment rose to its highest reading since May 2024, increasing for the second consecutive month and lifting about 2% above August. The gain was led by an improvement in buying conditions for durables, driven by more favorable prices as perceived by consumers. Year-ahead expectations for personal finances and the economy both improved as well, despite a modest weakening in views of labor markets.”
Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We're taking that vacation whether we like it or not 🛫
🤑 Wage growth is cooling. According to the Atlanta Fed’s wage growth tracker, the median hourly pay in August was up 4.6% from the prior year, down from the 4.7% rate in July.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈
🛢️ Oil prices fall. Brent crude futures fell below $70 a barrel for the first time in more than two years on Tuesday, closing at its lowest level since December 2021. From Bloomberg: “Downbeat economic data from the US and China — including weak import figures released Tuesday — have stirred fears about oil demand in the top two consumers, adding to concerns that a surplus will emerge next year and fueling record bearish positioning. That’s being compounded by surging output in producing nations outside the Organization of Petroleum Exporting Countries.“
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
⛽️ Gas prices fall. From AAA: “The national average for a gallon of gas kept up its torrid pace of decline, sinking six cents since last week to $3.24. The primary culprits behind the dip are low demand and falling oil costs.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
👍 Real incomes are up. From the Census: “Real median household income was $80,610 in 2023, a 4.0% increase from the 2022 estimate of $77,540. This is the first statistically significant annual increase in real median household income since 2019.”
Meanwhile, poverty ticked lower. From the Census: “In 2023, the official poverty rate fell 0.4 percentage points to 11.1%. There were 36.8 million people in poverty in 2023, not statistically different from 2022.“
💳 Card spending data is stable. From Bank of America: “Bank of America aggregated credit and debit card spending per household rose 0.9% year-over-year (YoY) in August, rebounding from the 0.4% YoY decline in July. On a month-over-month (MoM) basis, spending in August decreased 0.2% after rising 0.3% in July. In our view, this reflects a normalization of consumer spending as opposed to a weakening. Within the total, services spending momentum remains stronger than goods.”
For more on personal consumption, read: The state of the American consumer in a single quote 🔊
💼 Unemployment claims ticked higher. Initial claims for unemployment benefits rose to 230,000 during the week ending September 7, up from 228,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
🏠 Mortgage rates fall. According to Freddie Mac, the average 30-year fixed-rate mortgage fell to 6.2%, down from 6.35% last week. From Freddie Mac: “Mortgage rates have fallen more than half a percent over the last six weeks and are at their lowest level since February 2023. Rates continue to soften due to incoming economic data that is more sedate. But despite the improving mortgage rate environment, prospective buyers remain on the sidelines, as they negotiate a combination of high house prices and persistent supply shortages.”
There are 146 million housing units in the U.S., of which 86 million are owner-occupied and 39% of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
👎 Small business optimism deteriorates. The NFIB’s Small Business Optimism Index in August fell.
Importantly, the more tangible “hard” components of the index continue to hold up much better than the more sentiment-oriented “soft” components.
Keep in mind that during times of perceived stress, soft data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.5% rate in Q3.
For more on economic growth, read: Economic growth: Slowdown, recession, or something else? 🇺🇸
Putting it all together 🤔
We continue to get evidence that we are experiencing a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to get inflation under control. Though, with inflation rates having come down significantly from their 2022 highs, the Fed has taken a less hawkish tone in recent months — even signaling that rate cuts begin soon.
It would take a number of rate cuts before we’d characterize monetary policy as being loose, which means we should be prepared for relatively tight financial conditions (e.g., higher interest rates, tighter lending standards, and lower stock valuations) to linger. All this means monetary policy will be relatively unfriendly to markets for the time being, and the risk the economy slips into a recession will be relatively elevated.
At the same time, we also know that stocks are discounting mechanisms — meaning that prices will have bottomed before the Fed signals a major dovish turn in monetary policy.
Also, it’s important to remember that while recession risks may be elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs, and those with jobs are getting raises.
Similarly, business finances are healthy as many corporations locked in low interest rates on their debt in recent years. Even as the threat of higher debt servicing costs looms, elevated profit margins give corporations room to absorb higher costs.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have recently had some bumpy years, the long-run outlook for stocks remains positive.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
