Reflecting on 20 years of backwards financial moves ⏪
Reflecting on 20 years of backwards financial moves ⏪
Plus a charted review of the macro crosscurrents 🔀
Stocks fell last week with the S&P 500 shedding 1.2% to close at 5,123.41. It was the worst week since October. The index is now up 7.4% year to date and up 43.2% from its October 12, 2022 closing low of 3,577.03. For more on market volatility, read: Even strong stock market years can get very stressful 😱
I celebrated my birthday on Tuesday. And once again, I found myself reflecting.
A little over 13 years ago, I quit a stable well-paying job with benefits to blog about markets as a freelancer. Overnight, my income effectively went to zero — but that was part of the deal.
Unfortunately, things only got worse from there. I was horrible at budgeting. I did a poor job of securing enough freelance work to keep me afloat. At one point, my biggest client cut the rate they were paying me in half with little warning. And in about four months, it became clear that I was going broke.
In retrospect, it was a great learning experience. I learned about the challenges of finding work as a freelancer with little writing experience. I learned how quickly things will fall apart when your income relies too heavily on one client. I learned how much of a nightmare it can be to be responsible for things like accounting and IT. I learned how nerve-racking it can be to exist without health insurance. Importantly, I learned what I was really capable of when left to my own devices.
I have no regrets. While that decision may have put me on the path to short-term financial ruin, it also put me on the path to longer-term happiness and financial security. That September, I got hired as markets editor for Business Insider. And the rest is more or less history.
It turns out that a lot of my career history involved seemingly backwards financial moves. Here’s a quick timeline and summary I recently shared on X:
2004: 📈 got my first real job
2005: 📉 quit job for lower paying job
2006: 📉 quit job for similarly paying job in a much more expensive city
2010: 📉 laid off
2010: 📉 got job that paid less than previous job
2011: 📉 quit job to freelance
2011: 📉 got job that paid less than previous job
2016: 📈 quit job for higher paying job
2021: 📉 quit job for lower paying job
2021: 📉 quit job to start newsletter
Yes, it is true that there’s only been one time where I’ve accepted a job that offered more than what I was getting paid at the time. But in case you didn’t figure it out, I was getting raises and promotions at many of these jobs.
I’m not saying this to gloat (and to be clear, being a self-employed newsletter writer is anything but a walk in the park). Rather, it’s just been my experience that opportunity has often been defined by much more than what the next job was willing to pay on day one.
Great luck and incredible people 🍀
I’m aware of the fact that any success I’ve had wasn’t just the result of hard work and intelligence. There are people who work way harder than me, and there are a lot of people who are way smarter than me. Way smarter.
I’ve definitely benefited from having great luck.
I got my first big job through someone I got to know at an afterwork dodgeball league. Eight months after our first meeting, he emailed me out of the blue about a job vacancy on his team.
I got my first big freelance writing client through a colleague of a friend of a friend, all of whom I met by attending the alumni happy hours for a college I didn’t attend.
Another pivotal job came from someone who poached me. What was unusual about this was this same recruiter actually tried to poach me for that same job years before. The first time I spoke with them, I said no. The second time years later, I said yes.
I’ve also been extremely lucky to have generous mentors and brilliant colleagues along the way — people who seemed genuinely interested in lifting me up and celebrating my wins. These people exist.
If there’s one smart decision that I’ll take credit for, it’s the decision to move to NYC. Yes, it’s competitive as hell here. And yes, people who already have access and money often have an upper hand. But still, opportunities seem to spill out onto the streets here. And while there are plenty of people here who don’t care about you unless they can use you to advance their own interests, there are also a lot of people who’ll help rocket your career.
Zooming out 🔭
Everyone will have their own unique path. Some will find more success than others.
In my experience, few things ever go as planned. Much like the stock market, careers don’t follow smooth paths up and to the right. And often, the surprises are no fault of your own. Sometimes your luck is bad. Sometimes your luck is extremely good.
I do think that just because something doesn’t work out doesn’t mean that the decisions that got you there were regrettable. At the very least, you hopefully learn something. And maybe those lessons help you make better decisions in the future.
All that said, this is coming from someone who hopefully has many years ahead of him. That means there’s plenty of time for things to go horribly wrong. Or maybe I’ll get lucky again.
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More about me on TKer:
If you’re looking for discussions about the markets and the economy today, read:
JPMorgan's Dimon says the quiet part out loud about quarterly earnings 👀
Narratives will change, and yet the stock market will go up 🆙
Wells Fargo raises its target for the S&P 500 📈
On Monday, Wells Fargo’s Christopher Harvey raised his year-end target for the S&P 500 to 5,535 from 4,625. This is his first revision from his initial target.
“In our view, the bull market, AI's secular growth story, and index concentration have shifted investors' attention away from traditional valuation measures and toward longer-term growth and discounting metrics,” Harvey wrote. “Since the end of 2022, investors' valuation thresholds seemed to decrease while time horizons increased, a function of this secular optimism.”
Harvey is not alone in tweaking his forecasts. Their peers at Oppenheimer, RBC, Societe Generale, BofA, Barclays, UBS, Goldman Sachs, and CFRA are among those who’ve also raised their targets.
Don’t be surprised to see more of these revisions as the S&P 500’s performance, so far, has exceeded many strategists’ expectations.
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
👎 Inflation heats up. The Consumer Price Index (CPI) in March was up 3.5% from a year ago, up from the 3.2% rate in February. Adjusted for food and energy prices, core CPI was up 3.8%, about the same level as the prior month.
On a month-over-month basis, CPI rose 0.4% and core CPI increased by 0.4%.
If you annualize the six-month trend in the monthly figures — a reflection of the short-term trend in prices — CPI was rising at a 3.2% rate and core CPI was climbing at a 3.9% rate.
Overall, while many broad measures of inflation continue to hover above the Fed’s target rate of 2%, they are way down from peak levels in the summer of 2022.
For more, read: Inflation: Is the worst behind us? 🎈
🤑 Wage growth is cooling. According to the Atlanta Fed’s wage growth tracker, the median hourly pay in March rose by 4.7% from the prior year, down from the 5.0% rate in February.
“If wage growth is cooling and price inflation is rising, we ought to be less concerned about runaway inflation and somewhat more concerned that consumers begin making trade-offs, cutting back on spending,” Renaissance Macro’s Neil Dutta wrote on Wednesday. “That, in turn, will weigh on prices. “
For more on why the Fed wants wage growth to cool, read: A key chart to watch as the Fed tightens monetary policy 📊
The gap wage growth between those who switch jobs and those who stay at their jobs continues to close. Job switchers saw 5.6% wage growth in the 12 months ending in March, whereas job stayers saw 4.9% growth during the period.
🤷🏻♂️ Inflation expectations mixed. From the New York Fed’s March Survey of Consumer Expectations: “For the third consecutive month, median one-year ahead inflation expectations remained unchanged at 3.0% in March. In contrast, the median three-year ahead inflation expectations increased to 2.9% from 2.7%, whereas the median five-year ahead decreased to 2.6% from 2.9%.”
For more on inflation, read: Inflation: Is the worst behind us? 🎈
👎 Consumer sentiment recovery stalls. From the University of Michigan’s April Surveys of Consumers: “Sentiment moved sideways for the fourth straight month, as consumers perceived few meaningful developments in the economy. Since January, sentiment has remained remarkably steady within a very narrow 2.5 index point range, well under the 5 points necessary for a statistically significant difference in readings. Consumers perceived little change in the state of the economy since the start of the new year. Expectations over personal finances, business conditions, and labor markets have all been stable over the last four months.“
For more on sentiment, read: The economic vibes are healing 😀
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.88% from 6.82% the week prior. From Freddie Mac: “Mortgage rates have been drifting higher for most of the year due to sustained inflation and the reevaluation of the Federal Reserve’s monetary policy path.”
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
💼 Unemployment claims tick lower. Initial claims for unemployment benefits fell to 211,000 during the week ending April 6, down from 222,000 the week prior. While this is above the September 2022 low of 182,000, it continues to trend at levels historically associated with economic growth.
For more, read: Labor market: How cool will it get? 🥶
💳 Card data suggests spending is holding up. From JPMorgan: “As of 05 Apr 2024, our Chase Consumer Card spending data (unadjusted) was 1.8% below the same day last year. Based on the Chase Consumer Card data through 05 Apr 2024, our estimate of the U.S. Census March control measure of retail sales m/m is 0.49%.“
From Bank of America: “Total card spending per household rose 0.3% year-over-year (YoY) in March, following the leap-year boosted 2.9% YoY increase in February, according to Bank of America aggregated credit debit card data. The early Easter holiday likely brought some spending from April into March. Controlling for these seasonal impacts, spending fell 0.7% month-over-month (MoM).”
For more on what’s bolstering personal consumption activity, read: Consumer finances are somewhere between 'strong' and 'normal' 💰
👎 Small business optimism deteriorates. The NFIB’s Small Business Optimism Index ticked lower in March.
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 🙊, 4 different ways of looking at the exact same economy 🪖👒🎩🧢 and Sentiment: Finally a vibe-spansion? 🙃
📈 Near-term GDP growth estimates look good. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.4% rate in Q1.
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. While it’s true that the Fed has taken a less hawkish tone in 2023 and 2024 than in 2022, and that most economists agree that the final interest rate hike of the cycle has either already happened, inflation still has to stay cool for a little while before the central bank is comfortable with price stability.
So we should expect the central bank to keep monetary policy tight, 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 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 had a pretty rough couple of 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 »
TKer’s best 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.
The sobering stats behind '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, 318 large-cap equity funds were in the top half of performance in 2020. Of those funds, 39% came in the top half again in 2021, and just 5% were able to extend that streak through 2022. If you set the bar even higher and consider those in the top quartile of performance, just 7% of 156 large-cap funds remained in the top quartile in 2021. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2022.
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%.
Happy birthday Sam!
Happy Belated Birthday, Sam!