There are some things technology will never replace ✍️
Discover more from TKer by Sam Ro
There are some things technology will never replace ✍️
Plus a charted review of the macro crosscurrents 🔀
With the emergence of generative artificial intelligence (GenAI) technologies like AI chatbots, there are concerns about how writing could become an obsolete career path as jobs are destroyed. (I think these fears are overblown and misplaced. Read more here and here.)
While I expect work related to the more tedious and mundane forms of writing could become automated, I think there are many forms that’ll continue regardless of how good the technology gets.
One powerful form of writing is the handwritten note.
In his “20 Life Lessons,” Wall Street legend Byron Wien said: “When someone extends a kindness to you, write them a handwritten note, not an e-mail. Handwritten notes make an impact and are not quickly forgotten.“
About 15 years ago, when I worked at Forbes, my team hosted a nice dinner and reception. Byron was one of the 20 or so guests. At one point, he invited me to sit with him and chat, which surprised me because I was without a doubt the least influential person at that event. (The encounter makes more sense once you read Life Lessons 3 and 8.)
A few days later, I noticed a handwritten note on Pequot Capital stationary on my boss’s desk. For some reason, it jumped out to me amid the printouts, magazines, and whatever else might’ve been on that desk. I asked my boss about it, and he said it was from Byron. The note thanked him for hosting the event, and it expressed gratitude for his friendship.
Byron was right. Handwritten notes are not quickly forgotten. And this particular note wasn’t even addressed to me!
As technological advancements become increasing parts of our lives, the remaining human interactions become that much more powerful. I think Byron understood this.
Byron died at 90 on Wednesday.
Without a doubt, his legacy lives on! Take some time to read his 20 Life Lessons.
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Related from TKer:
On markets and spaghetti marinara 🍝
Stocks tumbled last week, with the S&P 500 falling 2.5% to close at 4,117.37, the lowest level since May 24. The index is now up 7.2% year to date, up 15.1% from its October 12, 2022 closing low of 3,577.03, and down 14.1% from its January 3, 2022 record closing high of 4,796.56.
Notably, the S&P is now down 10% from its July 31 intra-year high (a move that’s actually pretty typical in an average year).
When markets tumble, it’s time for comfort food. And my favorite comfort food is spaghetti marinara.
Earlier this month, I did a taste test pitting Rao’s “Homemade” marinara against Good & Gather, Target’s private label brand. The former goes for about $8 a jar, and the latter goes for about $2.
I shared my observations on social media. And of course, many purists missed the point of the exercise and sent me messages arguing that I should take the time to make my own sauce from scratch.
Anyone who knows me or who has been following me on Instagram knows that I like to cook. But sometimes I want spaghetti without having to get all the groceries, prepare the ingredients, and do all the extra dishes. Sometimes I just don’t have the time or energy.
The availability of jarred sauce means people can enjoy spaghetti marinara for less money and less time. That means more money and time to spend on other things.
To be sure, the proliferation of ready-to-eat, shelf-stable sauce was not the end of homemade sauce. For many, it’s a valued family tradition. When homemade sauce is done well, jarred sauce can’t compete. When it’s good enough, people will pay up for a good marinara at an Italian red sauce joint. Who doesn’t have a favorite Italian restaurant they go to?
Whether it’s the steam engine, the tractor, the spreadsheet, the internet, AI, or something else, technological advancements will continue to disrupt the way we do things. Jobs will be destroyed. Jobs will be created. Meanwhile, the old way of doing things will never completely go away.
But most importantly, these advances free up time and money, which can now be used to pursue other productive things. This accelerates new innovations. From there, standards of living improve, the economy grows, earnings rise, and stocks go up.
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More from TKer:
Listen up! 🎧
🔊 I was on Odd Lots’ Lots More podcast with Bloomberg’s Joe Weisenthal and Tracy Alloway! We talked about how TKer got its name, why the stock market goes up, why the economy can seemingly be expanding and receding at the same time, how the odds on Vegas craps tables have gotten worse, and more! Listen to it on Apple Podcasts or Bloomberg!
📺 I caught up with J.C. Parets and Spencer Israel on StockMarketTV! We talked about market sentiment, the outlook for earnings, why Threads isn’t getting traction, and more! Check it out on YouTube here.
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🎈 Inflation remains cool, but ticks up. The personal consumption expenditures (PCE) price index in September was up 3.4% from a year ago, unchanged from August’s level. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 3.7% during the month after coming in at 3.8% higher in the prior month.
On a month over month basis, the core PCE price index was up 0.3%, up from the prior month’s print of 0.1%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 2.5% and 2.8%, respectively.
The bottom line is that while inflation rates have been trending lower, many measures continue to be above the Federal Reserve’s target rate of 2%.
For more on the implications of cooling inflation, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀
🛍️ Consumer spending ticked higher last month. According to BEA data, personal consumption expenditures increased 0.7% month over month in September to a record annual rate of $18.85 trillion.
For more on the resilience of the consumer, read: Don't underestimate the American consumer 🛍️
💳 Spending is cooling, according to credit card data. From BofA: “Total card spending per HH was down 0.8%y/y in the week ending Oct 21 according to BAC aggregated credit and debit card data. Total spending per HH ex gas was down 0.4% y/y, while retail ex autos was down 2.0% y/y in the week ending Oct 21.“
For more on household finances, read: People have money 💵
💪 Business investment is strong. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — rose 0.6% to a record $74.46 billion in September.
For more on the forces bolstering economic growth, read: 9 reasons to be optimistic about the economy and markets 💪
💼 Unemployment claims tick up. Initial claims for unemployment benefits rose to 210,000 during the week ending October 21, up from 200,000 the week prior. While this is up from a September 2022 low of 182,000, it continues to trend at levels associated with economic growth.
For more on the labor market, read: The hot but cooling labor market in 16 charts 📊🔥🧊
🏘️ New home sales jump. Sales of newly built homes increased by 12.3% in September to an annualized rate of 759,000 units.
For more on housing, read: The U.S. housing market has gone cold 🥶
📈 Mortgage rates continue to rise. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 7.79%, the highest level since November 2000. From Freddie Mac: “For the seventh week in a row, mortgage rates continued to climb toward eight percent, resulting in the longest consecutive rise since the Spring of 2022. Rates have risen two full percentage points in 2023 alone and, as we head into Halloween, the impacts may scare potential homebuyers. Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and greater inventory.“
For more on home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
⛽️ Gas prices fall. From AAA: “The national average for a gallon of gas dipped by only three cents since last week to $3.53. Despite slackening demand, the pace of falling gas prices is being held up by the cost of oil, which is hovering in the mid-$80s per barrel.”
For more on energy prices, read: The other side of the surging oil price story 🛢
🇺🇸 U.S. economic growth accelerated. U.S. GDP grew at a robust 4.9% rate in Q3, driven by a 4.0% jump in personal consumption.
For more on broad measures of the U.S. economy, read: Still waiting for that recession people have been worried about 🕰️
👍 Private sector surveys improve. S&P Global’s Flash U.S. Composite PMI survey showed services activity and manufacturing output in October were growing at an improving pace. From S&P Global’s Chris Williamson: “Hopes of a soft landing for the US economy will be encouraged by the improved situation seen in October. The S&P Global PMI survey has been among the most downbeat economic indicators in recent months, so the upturn in US output growth signaled at the start of the fourth quarter is good news. Future output expectations have also turned up despite rising geopolitical concerns and domestic political tensions, climbing to the joint-highest for nearly one-and-a-half years.“
The survey also suggested prices were cooling. From Williamson: “Sentiment has improved in part due to hopes of interest rates having peaked, something which looks increasingly likely given the further cooling of inflationary pressures witnessed in October. In spite of higher oil prices, firms’ input cost inflation fell sharply to the lowest since October 2020, and average selling prices for goods and services posted the smallest monthly rise since June 2020.“
For more on improving growth and cooling inflation, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀
🇺🇸 Most U.S. states are still growing. From the Philly Fed’s State Coincident Indexes report: "Over the past three months, the indexes increased in 39 states, decreased in 10 states, and remained stable in one, for a three-month diffusion index of 58. Additionally, in the past month, the indexes increased in 30 states, decreased in 17 states, and remained stable in three, for a one-month diffusion index of 26."
For more on broad measures of the U.S. economy, read: Still waiting for that recession people have been worried about 🕰️
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.3% rate in Q4.
For more on the forces bolstering economic growth, read: 9 reasons to be optimistic about the economy and markets 💪
Putting it all together 🤔
We continue to get evidence that we could see 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 bring inflation down. While it’s true that the Fed has taken a less hawkish tone in 2023 than in 2022, and that most economists agree that the final interest rate hike of the cycle has either already happened or is near, inflation still has to cool more and 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 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 during the first half of 2023. As you stretch the time horizon, the numbers get more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 85.6% underperformed. And over a 20-year period, 93.6% underperformed.
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%.
