Three types of 'facts' that can lead you astray 🗺️
Plus a charted review of the macro crosscurrents 🔀
📈 Stocks rallied last week, with the S&P 500 rising 0.2% to end at 5,648.40. The index is now up 18.4% year to date and up 57.9% from its October 12, 2022 closing low of 3,577.03. For more on recent stock market moves, read: The best days in the stock market come at the worst times 📉🚀
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Most major news outlets are very good at accurately reporting whatever they report.
But that doesn’t mean what you see reported won’t lead you astray.
In my many years consuming and processing an ungodly amount of news, I’ve noticed three types of accurately reported facts that can be problematic.
1. A source who’s quoted accurately, but the source is wrong 😑
Generally speaking, reporters care about getting the facts right. And when the news needs interpreting, they generally want to get the interpretation right too.
However, there are limits to any reporters’ expertise on a subject. So a common practice is to bring in an outside source to speak on the matter. Sometimes, it’s a professional expert on a particular subject matter. Sometimes, it’s an insider in an industry. Sometimes, it’s a politician. Sometimes, it’s a “man on the street.”
Unfortunately, even when these sources are quoted accurately, what they say isn’t always factual or theoretically sound. In other words, it may be a fact that a source said a thing — but what they say may not be factual.
Sometimes, these people are actually charlatans who just don’t know what they’re talking about. Sometimes, they’re relying on bad information. Sometimes, they misspeak. Sometimes, they’re lying.
This is particularly an issue in live TV journalism, where there’s rarely the time to fact-check everything a guest says in real-time. Even in written journalism, where there’s time for reporters to vet what they’ve been told and for editors to add layers of quality control, it’s not uncommon to see some crank’s unsound argument get published with little scrutiny.
Many outlets are good about issuing corrections and clarifications. But that’s often well after the damage is done. And not all of us are monitoring everything they consume for these updates.
2. A stat that’s true, but lacks relevant context 🤷🏻♂️
Financial news is riddled with stats that are often at extremes or even breaking records. And without context, we’re left to assume these developments must mean something.
In recent months, we’ve all seen headlines about stock market concentration at historic highs, quarterly earnings estimates getting revised down, valuations above long-term averages, debt delinquencies rising, and saving rates falling.
Everything listed above is factually true. And any one of these stats understandably trigger concern.
But are they necessarily bad? No.
High stock market concentration alone doesn’t mean trouble is coming. Quarterly earnings estimates usually get revised down, even as actual earnings trend upward. Above-average valuations don’t mean stocks prices are doomed to fall. Delinquencies may be rising, but they’re mostly normalizing from unusually low levels. And a falling saving rate might actually be a positive signal.
Sure, it’s often the case that something that sounds bad is actually bad.
But there are also many cases where something that sounds bad is actually benign. And sometimes it’s even good.
3. An anecdote that’s real, but the bigger picture reveals something else 🖼️
You don’t have to look far to find personal, local, or company-specific stories that appear to contradict headline economic data.
Companies are announcing layoffs, yet the national layoff rate is low. A retailer is seeing falling sales, yet government data says retail sales are at record highs. The person with receipts proving that the sandwich they bought today is 10% more expensive than it was a year ago, yet the Federal Reserve is telling us the inflation rate is closer to 2%.
Even during boom times, you’ll find areas of the economy doing very poorly and anecdotes that seem to reflect conflicting narratives. Similarly, you’ll find areas of strength during economic downturns.
This is just the nature of how things at the economy-wide level work. Headline numbers relating to stats like layoffs, sales, and prices reflect aggregations and averages. They are amalgamations of what’s both good and bad. There’s no conspiracy here.
This is not to say that during good times we should ignore what’s bad out there. In the long history of economic progress, there has been many downturns — some lasting years.
What are we to do?! 🤔
I think news from the big media outlets will continue to be a great source of information.
But I’d caution against immediately changing what may be your sound worldview because one news story contradicts it.
I created TKer as a service to help stock market investors navigate the news. I do my best to curate the best information while also dispelling widely circulated myths.
But along the way, I’ve also written guides on how to process various kinds of news and information.
For starters, I’d suggest reading TKer’s “5-step guide to processing ambiguous news in the markets and the economy.”
Here are a few more pieces that I think will help you as you deal with the deluge of information you face every day.
You can make any piece of data look bad if you try 🔄: There’s more than one way to frame a piece of economic or financial market data. It might be better than expected relative to economists’ expectations, but it could also be worse than expected relative to traders’ expectations. That same stat could be down on a month-over-month basis and also up on a year-over-year basis. It may be high relative to the 10-year average but low relative to the 5-year average. It may look bad on an absolute basis, but it may look good relative to what may be the normal course of business. More here.
Beware alarming business stories that get a lot of news coverage 🗞️: Just because a story gets a lot of news coverage doesn’t necessarily mean it’s representative of what’s going on in the world. This is an issue with news, a business that’s incentivized to address its audience’s interests and not necessarily its needs. More here.
4 different ways of looking at the exact same economy 🪖👒🎩🧢: Often times, those discussing what’s driving the stock market will appear in conflict with those discussing what’s driving the economy. And sometimes, those discussing what’s driving the economy will appear in conflict with each other. These diverging views will happen even though everyone is in total agreement about the validity of the measurable data they’re citing. How is this possible? I think we can begin to disentangle what’s going on by thinking of people as wearing one of many different hats. There are at least four important hats that are worth a closer look. More here.
'Check yourself' as the data zig zags ↯: Analyzing short-term moves in data is treacherous work for anxious investors and traders who are eager to adjust their positions in anticipation of major shifts in the economic narratives. Unfortunately, the end of a prevailing narrative and the emergence of a new narrative only become clear with months of hindsight. What might initially look like an inflection in a trend is often just noise. So it’s probably best not to lose one’s mind over one month’s economic data. The same goes for short-term moves in the financial markets. More here.
Why permabears seem right even when they're wrong 🐻: If you’re bullish, you make money when stocks go up (i.e., you’re long the market). So if you’re bearish, you make money when stocks go down (i.e., you’re short the market), right? In my conversations over the years with retail investors, most don’t swap their long positions for short positions when they turn bearish. Rather, they tend to embrace more of a risk-on versus risk-off approach. This nuance helps us understand why permabears seem right to so many. More here.
How to think of analysts' earnings estimates 🧮: Wall Street’s research departments attract some of the smartest, most resourceful people you’ll ever meet. And the research and analysis these folks produce is often very informative. But for many people counting on these analysts, the only numbers that matter are the earnings estimates and price forecasts. And unfortunately, while these estimates and forecasts are generally within a reasonable range of what actually happens, they’re often not accurate enough for investors and traders to be able to generate a ton of alpha. I think one of the bigger risks investors sometimes take stems from ill-informed attempts at extracting signals from analyst estimates, and trading too heavily on that information. More here.
The first question to ask when a markets expert speaks 🙋🏻♂️: Some people try to make money trading the stock market over short-term periods. Some aim to build wealth by investing in the stock market over long, multi-year timeframes. Many do some combination of both. All of these people seek out information and insights that might help them get an edge and improve their returns. Unfortunately, trading tips and investment advice come with a lot of the same jargon that make it easy to confuse the two if you’re not paying careful attention. When a markets expert starts talking, the first question you should ask is: “What is the timeframe?” More here.
Mind the anecdata 🤏: Anecdotes can be valuable in that they often put a face on the stats we read about every day. Sometimes, they will indeed confirm changes in the economic tides. However, I’d approach anecdotes with caution. If they’re not confirmed by broader measures or if they conflict with the confluence of available data, then you risk making type I and type II (i.e., a false negative) errors. More here.
Don’t confuse your relatives with your absolutes 🤔: Various aspects of the markets and the economy can be worse and good, simultaneously. They can also be both better and bad. That’s because “worse” and “better” are relative terms, and “good” and “bad” are absolute terms. Kind of like when you’re starting to recover from the flu. Maybe you feel better. But that doesn’t mean you feel good. In the markets and the economy, this can get confusing when you consider developments in the various metrics investors follow. More here.
11 ways cynics argue any news is bad news 👎: Regardless of whether a market or economic metric went up or down, there were bears coming out to explain why the development was bad regardless of the direction. More here.
Zooming out 🔭
Investing is complicated.
And by extension, navigating the news that may inform your investment decisions can also be complicated.
Hopefully, some of the information discussed above will make you better at assessing news.
Listen up! 🎧
I was on the Wealthy Behavior podcast with Heritage Financial President & CEO, Sammy Azzouz. We discussed the early August market meltdown, the cooling economy, the signals from earnings season, the outlook for monetary policy, and much more! Listen on Apple Podcasts, Android, Spotify, and YouTube!
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🎈 Inflation trends are cool. The personal consumption expenditures (PCE) price index in July was up 2.5% from a year ago, unchanged from June’s rate. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 2.6% during the month, matching the lowest print since March 2021.
On a month over month basis, the core PCE price index was up 0.2%, effectively unchanged from the previous month. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 1.7% and 2.6%, respectively.
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' ⏰
🛍️ Consumers are spending. According to BEA data, personal consumption expenditures increased 0.5% month over month in July to a record annual rate of $19.58 trillion.
Adjusted for inflation, real personal consumption expenditures rose by 0.4%.
For more on resilient spending, read: There's more to the story than 'excess savings are gone' 🤔
💰 About that declining saving rate. The personal saving rate (i.e., the percent of income left after spending money and paying taxes) declined to 2.9% in July. It’s been trending below prepandemic levels.
While a falling saving rate is in line with what you’d expect with the cooling labor market, it may also be a reflection of a lower need to save amid rising stock prices and record-high home values.
For more, read: There's more to the story than 'excess savings are gone' 🤔 and A low saving rate isn’t necessarily a bad thing 💸
🤷🏻♂️ Consumer vibes are meh. From the University of Michigan’s August Surveys of Consumers: “Consumer sentiment confirmed its early-month reading; after drifting down for four months, sentiment inched up 1.5 index points above July and is currently 36% above the all-time historic low from June 2022. Consumers’ short- and long-run economic outlook improved, with both figures reaching their most favorable levels since April 2024 and a particularly sizable 10% improvement for long-run expectations that was seen across age and income groups.“
The Conference Board’s Consumer Confidence Index ticked modestly higher in August. From the firm’s Dana Peterson: “Consumers continued to express mixed feelings in August. Compared to July, they were more positive about business conditions, both current and future, but also more concerned about the labor market. Consumers’ assessments of the current labor situation, while still positive, continued to weaken, and assessments of the labor market going forward were more pessimistic. This likely reflects the recent increase in unemployment. Consumers were also a bit less positive about future income.”
More from Peterson: “Consumers were likely rattled by the financial market turmoil in early August, as they were less upbeat about the stock market. In August, 46.9% of consumers expected stock prices to increase over the year ahead (down from 50.6% in July), while 27.2% expected a decrease (up from 23.1%). August’s write-in responses also included more mentions of stock prices and unemployment as affecting consumer’s views of the US economy. However, consumers did not change their views about a possible recession: the proportion of consumers predicting a recession was stable and well below the 2023 peak.“
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 🛫
👎 Consumers feel less great about the labor market. According to the University of Michigan’s August Survey’s of Consumers, people expect the unemployment rate to tick higher.
From The Conference Board’s August Consumer Confidence survey: “[C]onsumers’ appraisals of the labor market deteriorated in August. 32.8% of consumers said jobs were ‘plentiful,’ down from 33.4% in July. 16.4% of consumers said jobs were ‘hard to get,’ slightly up from 16.3%.”
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and it’s been reflecting a cooling labor market.
For more on the labor market, read: The labor market is cooling 💼
💼 Unemployment claims ticked lower. Initial claims for unemployment benefits declined to 231,000 during the week ending August 24, down from 233,000 the week prior. While this metric continues to be at levels historically associated with economic growth, recent prints have been trending higher.
For more on the labor market, read: The labor market is cooling 💼
🔭 What the next decade of job gains looks like. From the BLS: “The U.S. economy is projected to add 6.7 million jobs from 2023 to 2033... Total employment is projected to increase to 174.6 million and grow 0.4% annually, which is slower than the 1.3% annual growth recorded over the 2013−23 decade.“
🤑 Wage growth is cooling. According to the Atlanta Fed’s wage growth tracker, the median hourly pay in July was up 4.7% from the prior year, down from the 5.3% rate in June.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈
🏭 Business investment activity ticks lower. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — declined 0.1% to $73.6 billion in July.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road. While the growth rate has leveled off a bit, they continue to signal economic strength in the months to come.
For more, read: The economy has gone from very hot to pretty good 😎 and 'Check yourself' as the data zig zags ↯
⛽️ Gas prices fall. From AAA: “Pump prices are still falling, but at a slower pace than recently, dipping just two cents to $3.36 since last week. A slight uptick in gas demand may reflect the last hurrah for summer travelers. A storm system forming in the Atlantic may pose a threat to falling gas prices as well… According to new data from the Energy Information Administration (EIA), gas demand rose last week from 9.19 million b/d to 9.30. Meanwhile, total domestic gasoline stocks fell from 220.2 to 218.4 million barrels, and gasoline production decreased last week, averaging 9.6 million daily. Unspectacular gasoline demand and falling oil costs may cause pump prices to slide further.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.35%, down from 6.46% last week. From Freddie Mac: “Mortgage rates fell again this week due to expectations of a Fed rate cut. Rates are expected to continue their decline and while potential homebuyers are watching closely, a rebound in purchase activity remains elusive until further declines are seen.”
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 😖
🏠 Home prices rise. According to the S&P CoreLogic Case-Shiller index, home prices rose 0.2% month-over-month in June. From S&P Dow Jones Indices’ Brian Luke: “Home prices and inflation continue to factor into the political agenda coming into the election season. While both housing and inflation have slowed, the gap between the two is larger than historical norms, with our National Index averaging 2.8% more than the Consumer Price Index. That is a full percentage point above the 50-year average. Before accounting for inflation, home prices have risen over 1,100 percent since 1974, but have slightly more than doubled (111%) after accounting for inflation.“
For more on home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏢 Offices are still relatively empty. From Kastle Systems: “Peak office occupancy fell more than three points last week, down to 54.8% on Tuesday. The decline is partly due to Chicago’s drop of more than thirty points to 34.9%, as the Democratic National Convention events likely kept workers at home. The Friday low was 31.5%, half a point higher than last week.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
📈 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 could come later this year.
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 »
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.
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%.
