Discover more from TKer by Sam Ro
No amount of risk management prepares you for when Sam Ro’s apartment gets flooded 🚣🏻
Plus a charted review of the macro crosscurrents 🔀
Stocks pulled back last week with the S&P 500 shedding 2.3% to close at 4,478.03. The index is now up 16.6% year to date, up 25.2% from its October 12 closing low of 3,577.03, and down 6.6% from its January 3, 2022 record closing high of 4,796.56.
There was quite a bit of economic news last week. On balance, the data continues to tell us we could experience a “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession. You can read more on the data below in TKer’s weekly review of the macro crosscurrents
Let’s now switch topics for a moment and talk about unexpected events.
My apartment got flooded 🌊
On Tuesday morning, I heard water dripping in the air-conditioning ducts in the ceiling of my Brooklyn apartment.
It was a little louder than the condensation you sometimes hear form on humid days. So I took the elevator down and informed my doorman and one of the building’s handymen who happened to be at the front desk. The handyman said he’d grab some stuff and then come right up.
I went back up first, and when the elevator doors opened, the hallway was under about an inch of flowing water.
I rushed to my apartment to find water spilling out of the ceiling air vents, the smoke detector, and two concealed sprinkler heads that I never realized were there.
My living room was under about a half-inch of water. (One of the handymen later explained to me that if water is dripping from the ceiling, there’s probably ten times as much water spilling down the walls — which is why the floors get flooded so quickly.)
Now, I’m not ashamed to admit I live in a pretty nice high-rise building that’s very well-staffed and resourced. (Hey, the stock market happens to be way up since I started writing about the stock market usually going up many years ago 😉.) So things moved very quickly. Within a few hours, the leak was addressed, most of the water was suctioned out, and contractors were rolling in with industrial fans and dehumidifiers.
As of Sunday morning, a bunch of drywall and molding was torn out of my unit. The fans and dehumidifiers continue to run around the clock. There’s still quite a bit of work to be done, and my day-to-day has been disrupted as I am currently living in a hotel.
To be continued…
Some perspective 🧐
Honestly, it’s not that bad. It certainly helps that my rent has been suspended and my landlord is responsible for repairs.
It’s an inconvenience, and I won’t get back the lost time. But if this goes down as one of the top 100 bad things that ever happen to me, then I will have lived a blessed life. There are far worse things that happen.
This has actually been the third time I’ve been in a home that got flooded. It happened in my family’s basement in Louisville when I was in high school. And it happened in my midtown studio in 2010. Neither were “flood” floods. They were an inch or few of water. An inconvenience nevertheless.
One habit I’ve picked up from these experiences is that I never leave anything valuable on the floor, no matter how high off the ground my home may be. The only things making contact with my floor are rugs and the legs of my furniture. Not everyone can get away with this, but I have been able to.
This habit has saved me from a lot of heartache and headache.
Still, no amount of risk mitigation and experience prepared me mentally for how much of an inconvenience this whole experience has been so far. I still have days or weeks of disruption to look forward to as we have yet to figure out how much of the floor and ceiling needs to get replaced and when all that will happen.
Isn’t this a newsletter about stocks and investing? 🤨
This may sound silly, but I think life can sometimes be like investing. It can be rewarding and prosperous, but it usually comes with trials and tribulations.
You hope for the best, while also trying to prepare for the worst. But in reality, no amount of preparation actually prepares you for when bad things happen.
And these bad things often happen unexpectedly at inopportune times.
Speaking of time, it can feel like it slows down during life’s tough moments and downturns in the market. Even though much of life and most of your investing horizon may be better than bad, it’s the difficult periods that come with the most visceral memories.
Of course, there’s a lot of luck involved in life and investing. Don’t fool yourself into thinking everything that goes right or wrong is of your own doing.
But we can improve our odds of coming out on top by learning from the successes and failures of history.
On the matter of luck, it can be unsettling to think about how little is actually under our control. Then again, when something is out of your control, you may be able to find peace when you “let go and let God.” In that same vein, it’s not unusual to realize much better-than-expected outcomes, because of bad experiences that were out of your control.
Anyway, here’s to hoping for some upside relative to where we are today.
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You can also find me regularly posting data, observations, and insights on TKer Notes.
Listen up! 🎧
I was on the Trendlines Over Headlines YouTube show with the extremely sharp Patrick Dunuwila, CMT. We talked about my background, financial media, market sentiment, leading economic indicators, Greek plays, and more! Watch it on YouTube!
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
💼 The hot labor market continues to cool. According to the Bureau of Labor Statistics, U.S. employers added a respectable 187,000 jobs in July. While the pace of job gains has been cooling, the numbers continue to confirm an economy with robust demand for labor.
Employers have added a whopping 1.8 million jobs since the beginning of the year. Total payroll employment is at a record 156.3 million jobs.
During the period, the unemployment rate fell to 3.5% from 3.6% the month prior. While it’s slightly above its cycle low of 3.4%, it continues to hover near 53-year lows.
Average hourly earnings rose by 0.42% month-over-month in July, down slightly from the 0.45% pace in June. On a year-over-year basis, this metric is up 4.36%, a rate that’s been cooling but remains elevated.
For more on the state of labor market dynamics, read: The labor market is simultaneously hot 🔥, cooling 🧊, and kinda problematic 😵💫
📈 Job switchers get better pay. According to ADP, which tracks private payrolls and employs a different methodology than the BLS, annual pay growth in July for people who changed jobs was up 10.2% from a year ago. For those who stayed at their job, pay growth was 6.2%.
For more on why the Fed is concerned about high wage growth, read: The complicated mess of the markets and economy, explained 🧩
💼 Jobs openings cool, layoffs stay low. TheJune Job Openings & Labor Turnover Survey confirmed that the labor market, while still hot, continues to cool. Job openings declined to 9.58 million during the month, down from 10.62 million in May.
During the period, there were 5.96 million unemployed people — meaning there were 1.61 job openings per unemployed person. This continues to be one of the most obvious signs of excess demand for labor.
From Indeed Hiring Lab’s Nick Bunker: “The US labor market has come off the boil, but it’s still simmering. Demand for workers – whether new ones or existing ones – remains high, and job seekers are still in the driver’s seat.“
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨
Employers laid off 1.52 million people in June. While challenging for all those affected, this figure represents just 1.0% of total employment. This metric continues to trend below pre-pandemic levels.
Hiring activity continues to be much higher than layoff activity, but ticked lower. During the month, employers hired 5.91 million people.
From Bunker: “The data on layoffs show just how resilient employer demand for workers remains. Layoff data, a loud emergency siren during economic downturns, are instead signaling a muted ‘all’s well’ for current employees.”
For more on why this metric matters, read: Watch hiring activity 👀
💼 Unemployment claims tick down. Initial claims for unemployment benefits ticked up to 227,000 during the week ending July 29, up from 221,000 the week prior. While this is up from the September low of 182,000, it continues to trend at levels associated with economic growth.
💳 Card spending growth is positive. From Bank of America: “Total card spending per HH was up 0.5% y/y in the week ending Jul 29, according to BAC aggregated credit and debit card data. ‘Barbenheimer’ likely drove the continued surge in y/y entertainment spending growth.“
From JPMorgan Chase: “As of 30 Jul 2023, our Chase Consumer Card spending data (unadjusted) was 0.8% above the same day last year. Based on the Chase Consumer Card data through 30 Jul 2023, our estimate of the US Census July control measure of retail sales m/m is 0.35%.“
For more on spending, read: Don't underestimate the American consumer 🛍️
🏘 The housing shortage continues. According to Census data, the homeowner vacancy rate fell to a record low 0.7% in the second quarter.
From JPMorgan’s Daniel Silver: “Through the swings in housing activity since the start of the pandemic, the supply of housing available for potential homebuyers has been limited and these limitations appear to have intensified (albeit marginally) during the second quarter.“
🏭 Manufacturing surveys get less bad. From S&P Global’s July Manufacturing PMI report: “Manufacturing continues to act as a drag on the US economy, the recent spell of malaise persisting at the start of the third quarter. However, producers are clearly shrugging off recession fears and planning for better times ahead.“
Similarly, the ISM’s July Manufacturing PMI signaled contraction in the sector for the ninth consecutive month, but the pace of the contraction eased.
These unfavorable survey results continue to come as hard broad measures of the economy continue to hold up.
🏭 Manufacturing construction is booming. Construction spending data from the Census Bureau suggests the state of manufacturing is much stronger than implied by the soft survey data.
For more on the U.S. manufacturing boom, read: Three massive forces have fueled the economic expansion for the past two years 💪
Keep in mind that during times of stress, soft data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
👍 Services surveys signal cooling growth. From S&P Global’s July Services PMI report: “The service sector remains the main engine of growth in the US economy, though there are signs of the motor spluttering amid rising headwinds. Business activity rose in July at the slowest rate since February, with the rate of expansion sliding further from May's recent peak in response to sharply reduced growth of new business. Although spending from foreigners in the US continues to grow strongly as the post-pandemic travel surge shows signs of persisting, demand growth waned from domestic customers, often linked to the rising cost of living and higher interest rates.“
Similarly, the ISM’s July Services PMI signaled growth in the sector, though decelerating growth.
For more on the forces bolstering economic growth, read: 9 reasons to be optimistic about the economy and markets 💪
⛓️ Supply chain pressures ease further. The New York Fed’s Global Supply Chain Pressure Index— a composite of various supply chain indicators — ticked up in July, but remains below levels seen even before the pandemic. It's way down from its December 2021 supply chain crisis high.
For more on the supply chain, read: We can stop calling it a supply chain crisis ⛓
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 3.9% rate in Q3.
For more on broad measures of the U.S. economy, read: Still waiting for that recession people have been worried about 🕰️
Putting it all together 🤔
The Federal Reserve has taken on a less hawkish tone, acknowledging on February 1 that “for the first time that the disinflationary process has started.“ At its June 14 policy meeting, the Fed kept rates unchanged, ending a streak of 10 consecutive rate hikes. While the central bank lifted rates again on July 26, most economists agree that the final rate hike of the cycle is near.
In any case, inflation still has to come down more before the Fed is comfortable with price levels. 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.
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. Those with jobs are getting raises. And many still have excess savings to tap into. Indeed, strong spending data confirms this financial resilience. So it’s too early to sound the alarm from a consumption perspective.
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.
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.
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.
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.
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%.
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.
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.
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.
At some point in the future, we’ll learn a new bull market in stocks has begun. Before we can get there, the Federal Reserve will likely have to take its foot off the neck of financial markets. If history is a guide, then the market should bottom weeks or months before we get that signal from the Fed.
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.
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.
…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.
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.
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.
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.
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%.
Here’s some info on how the index is constructed, according to the NY Fed: “We use the following subcomponents of the country-specific manufacturing PMIs: ‘delivery time,’ which captures the extent to which supply chain delays in the economy impact producers—a variable that may be viewed as identifying a purely supply-side constraint; ‘backlogs,’ which quantifies the volume of orders that firms have received but have yet to either start working on or complete; and, finally, ‘purchased stocks,’ which measures the extent of inventory accumulation by firms in the economy. Note that in case of the U.S., the PMI data start only in 2007, so for the U.S. we combine the PMI data with those from the manufacturing survey of the Institute for Supply Management (ISM).“