Discover more from TKer by Sam Ro
A 5-step guide to processing ambiguous news in the markets and the economy 📋
Plus a charted review of the macro crosscurrents 🔀
Stocks rallied last week, with the S&P 500 surging 5.9% to close at 4,358.34. It was the strongest one-week gain since November 2022. The index is now up 13.5% year to date, up 21.8% from its October 12, 2022 closing low of 3,577.03, and down 9.1% from its January 3, 2022 record closing high of 4,796.56.
One of the most talked about TKer newsletters has been July 2’s: 11 ways cynics argue any news is bad news 👎. In a nutshell, that dispatch addresses how changes in many metrics can be interpreted as a negative development regardless of the direction of the change. For example, a rising saving rate is arguably bad because it reflects an increasingly cautious consumer that is pulling back from spending. But a falling saving rate is also arguably bad because it reflects an increasingly irresponsible consumer who is spending beyond their means.
The truth is that all of these interpretations carry some theoretical weight.
So the question becomes: How does one decide between the positive interpretation versus the negative interpretation?
It’s no secret that TKer has been embracing the more positive view with most metrics. To be clear, this isn’t about being optimistic for the sake of being optimistic. There is a process.
Step 1: Have a robust macro framework 🖼️
When I was on Bloomberg’s “Lots More” podcast two weeks ago, co-host Tracy Alloway asked how I balance the signal coming from individual companies against macro trends.
I explained that for TKer, the first step is to have a robust macro framework.
Every Sunday, I provide subscribers with a review of macro crosscurrents, in which I compile a variety of macro metrics from the previous week. That’s followed by a section where I put it all together, synthesizing the macro narrative in TKer’s view — which by the way hasn’t changed much week to week or month to month in the last year or so.
For a long time, the macro story has been one defined by excess demand, confirmed by elevated job openings, record-high business investment order activity, and unusually strong consumer and business balance sheets. These economic tailwinds have been reflected in related trends like persistent job creation, resilient corporate earnings, and ever-increasing spending.
For more, read: 9 reasons to be optimistic about the economy and markets 💪
Step 2: Determine if the news is a macro story or an idiosyncratic story ⚖️
If an economic metric, a company’s earnings announcement, or some other news is in line with your macro framework, then congratulations: You just got confirmation that your macro narrative makes sense.
At the same time, it is often the case that individual companies — or even a group of companies — may say something that conflicts with prevailing narrative. A great example of this is when the big tech companies were announcing mass layoffs during the latter part of 2022.
For months, news of these high profile layoff announcements made for alarming frontpage headlines. But in those same months, net job creation in the economy persisted, aggregate measures on layoff activity remained low, and most other broad measures of activity held up. The big tech layoffs didn’t signal bigger problems for the economy. Rather, they reflected issues that were largely isolated to a sector that reflected less than 5% of employment.
Another example is the ambiguous signal from Walmart’s sales. As the country’s largest retailer, you might assume strong sales reflect a strong consumer. But sometimes, industry analysts and even Walmart management will say some of the incremental sales growth is coming from budget-constrained consumers trading down from pricier retailers — a sign that the economy may be in decline.
Despite months of stories about how consumers have been “trading down” (see here, here, and here), broad economic metrics have consistently confirmed the consumer has actually been healthy. In other words, while there may be some truth to this trading down behavior, it appears to be an anecdote that unfortunately doesn’t reflect the great macro narrative.
Step 3: Be mindful of short-term noise 🙉
A turn in one day’s, one week’s, one month’s, or even one quarter’s worth of data doesn’t always confirm a change in prevailing trends. In the real world, nothing — especially trends in the markets and the economy — develops in the form of smooth, straight lines.
The markets will have weeks, the economy will have bad months, and companies will have bad quarters. And sometimes, these periods will prove to be anomalies.
For more on all this, read: Let's not lose our minds over one month's economic data 😵💫 and The markets and the economy are 'full-on Monet' 🖼️.
Step 4: Beware the motivations of those communicating the information ⚠️
Even though the balance of the economic data may convincingly support one narrative, there will never be a shortage of people arguing otherwise.
Whether it’s a professional forecaster anchored in a faulty prediction, a politician seeking to undermine an incumbent, a news media organization chasing clicks, or a narcissist posting nonsense on their social media platforms for the sake of engagement, there are unfortunately too many reasons why people are out there pushing views that are corrupted by bias.
It’s a big red flag when someone attempts to push a narrative without offering other data to support that view, while also failing to sufficiently address data that may conflict with their view.
When someone presents an interpretation of news or data that conflicts with your understanding of the world, consider that person’s biases. That’s not to say you should be totally dismissive. Just be wary.
For more, read: Is good economic news really all that surprising? 📰 and You can make any piece of data look bad if you try 🔄
Step 5: Be humble and be vigilant 👀
TKer’s weekly review of macro crosscurrents doesn’t exist to confirm priors. Rather, it’s a regular pulse check intended to keep tabs on the economy.
At the end of the day, there’s a non-zero chance that warning signs from some metrics and some companies will prove to be leading indicators of something much worse. There is absolutely nothing in this world that can be argued with 100% certainty. That is why we must be humble, and we must be vigilant.
For what it’s worth at this moment, TKer’s macro framework suggests that the negative anecdotes out there are mostly isolated.
Related from TKer:
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🏛️ The Fed keeps rates unchanged. On Wednesday, the Federal Reserve kept monetary policy tight, leaving its target for the federal funds rate unchanged at a range of 5.25% to 5.5%.
From the Fed’s policy statement: “Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.”
Fed Chair Powell appeared to suggest there may not be a need for more rate hikes when he said: “Slowing down [rate hikes] is giving us, I think, a better sense of how much more we need to do, if we need to do more.“
That said, inflation still has to cool more and stay cool for a little while before the central bank is comfortable with price stability. So even though there may not be more rate hikes, rates are likely to be kept high for a while.
For more on the Fed’s fight to bring down inflation, read: Fed Chair Powell: 'We are navigating by the stars under cloudy skies' 🌌
👍 The labor market continues to add jobs. According to the BLS’s Employment Situation report released Friday, U.S. employers added 150,000 jobs in October. While the pace of job growth has generally been cooler, a 34th straight month of gains reaffirms an economy with robust demand for labor.
Employers have now added a whopping 2.4 million jobs since the beginning of the year. Total payroll employment is at a record 156.9 million jobs.
The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — ticked up to 3.9% during the month. While it’s above its cycle low of 3.4%, it continues to hover near 50-year lows.
For more on the labor market, read: The hot but cooling labor market in 16 charts 📊🔥🧊
📉 Wage growth cools. Average hourly earnings rose by 0.21% month-over-month in October, down slightly from the 0.33% pace in September. On a year-over-year basis, this metric is up 4.10%, a rate that’s been cooling but remains elevated.
📈 Job switchers still get better pay. According to ADP, which tracks private payrolls and employs a different methodology than the BLS, annual pay growth in September for people who changed jobs was up 8.4% from a year ago. For those who stayed at their job, pay growth was 5.7%.
💰 Unionized workers are getting raises. From Bloomberg: “Workers in the U.S. are getting record-breaking wage hikes this year thanks to strategic strikes and stunning contract wins. The result is a boost in middle-income wages and a shift in the balance of power between companies and their employees. Even before the United Auto Workers reached historic contract deals with carmakers, unions across the country had already won their members 6.6% raises on average in 2023 — the biggest bump in more than three decades, according to an analysis by Bloomberg Law.“
For more on why the Fed is concerned about high wage growth, read: The complicated mess of the markets and economy, explained 🧩
💼 Job openings rise again. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 9.55 million job openings in September. While this remains elevated above prepandemic levels, it’s down from the March 2022 high of 12.03 million.
And yes, September and August’s prints were upticks. But the trend still appears to be downward.
For more on how data can be noisy, read: The markets and the economy are 'full-on Monet' 🖼️
During the period, there were 6.36 million unemployed people — meaning there were 1.5 job openings per unemployed person. This continues to be one of the most obvious signs of excess demand for labor.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨
👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.52 million people in September. 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. During the month, employers hired 5.87 million people.
For more on why this metric matters, read: Watch hiring activity 👀
👎 Consumer confidence falls. The Conference Board’s Consumer Confidence Index in August fell as assessments of the present situation and expectations both deteriorated. From The Conference Board’s Dana Peterson: “Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular. Consumers also expressed concerns about the political situation and higher interest rates. Worries around war/conflicts also rose, amid the recent turmoil in the Middle East. The decline in consumer confidence was evident across householders aged 35 and up, and not limited to any one income group.“
Though: “Consumers’ assessment of their Family’s Current Financial Situation improved slightly in October.“
👎 Labor market confidence is cooling. From The Conference Board’s October Consumer Confidence survey: “Consumers’ appraisal of the labor market held steady in October. 39.4% of consumers said jobs were ‘plentiful,’ down slightly from 39.7% in September. However, 13.1% of consumers said jobs were ‘hard to get,’ down from 14.2%.“
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.
💼 Unemployment claims tick up. Initial claims for unemployment benefits rose to 217,000 during the week ending October 28, up from 210,000 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 📊🔥🧊
🏘️ Not many vacant homes. From the Census: “National vacancy rates in the third quarter 2023 were 6.6% for rental housing and 0.8% for homeowner housing.“
From JPMorgan: “Housing availability still looks pretty low, particularly with respect to units for sale, as the homeowner vacancy rate remained just slightly above its all-time low that we saw reported for the second quarter. But the rental vacancy rate has made a clearer move higher lately—while still remaining low by the standards of the past few decades—and this increase in vacant availability may be a factor contributing to recent moderation in rental inflation.“
🏠 Home prices rise. According to the S&P CoreLogic Case-Shiller index, home prices rose 2.6% month-over-month in August. From SPDJI’s Craig Lazzara: ““On a year-to-date basis, the National Composite has risen 5.8%, which is well above the median full calendar year increase in more than 35 years of data. The year’s increase in mortgage rates has surely suppressed housing demand, but after years of very low rates, it seems to have suppressed supply even more. Unless higher rates or other events lead to general economic weakness, the breadth and strength of this month’s report are consistent with an optimistic view of future results.“
For more on home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏭 Manufacturing surveys were mixed. S&P Global’s October Manufacturing PMI ticked up to 50.0 from 49.8 in September. From the report: “October PMI data signaled a stabilization of U.S. manufacturing conditions amid a renewed rise in new order inflows and firmer output growth. Demand conditions reportedly showed signs of improvement as customer interest revived, but this was once again largely focused on the domestic market as new export orders fell at a quicker rate.“
However, the ISM October Manufacturing PMI fell to 46.7 from 49 in September, signaling contraction in sector activity.
It’s worth remembering that soft data like the PMI surveys don’t necessarily reflect what’s actually going on in the economy.
For more on this, read: What businesses do > what businesses say 🙊
🔨 Construction spending rises. Construction spending rose 0.4% to an annual rate of $1.997 trillion in September.
For more on broad measures of the U.S. economy, read: Still waiting for that recession people have been worried about 🕰️
⛽️ Gas prices fall. From AAA: “Maintaining a steady if unspectacular pace, the national average for a gallon shaved off nine cents since last week, falling to $3.44. The primary reasons are flat demand at the pump and lower costs for oil.”
For more on energy prices, read: The other side of the surging oil price story 🛢
💳 Spending is mostly holding up, according to credit card data. From JPMorgan: “As of 21 Oct 2023, our Chase Consumer Card spending data (unadjusted) was 1.0% below the same day last year. Based on the Chase Consumer Card data through 21 Oct 2023, our estimate of the US Census October control measure of retail sales m/m is 0.49%.“
BofA’s card data is a bit cooler: “Total card spending per HH was down 0.3% in the week ending Oct 28, according to BAC aggregated credit and debit card data. Total spending per HH ex gas increased 0.1% y/y, while retail ex autos was down 1.7% y/y in the week ending Oct 28. October spending growth looks a little soft but stable.“
For more on household finances, read: People have money 💵
💪 Labor productivity is up. From the BLS: “Nonfarm business sector labor productivity increased 4.7% in the third quarter of 2023… as output increased 5.9% and hours worked increased 1.1%. The increase in labor productivity is the highest rate since the third quarter of 2020, in which productivity increased 5.7%.
From Nationwide Financial Markets’ Oren Klachkin: “Persistent hiring strains and continuous investment on the intellectual property front suggest that productivity will stay on a firm trajectory.”
💸 Profit margins are beating expectations. In a report published Oct. 29, BofA analysts observed: “Following Week 3, 246 companies representing 64% of S&P 500 earnings are in. Reported earnings so far came in 7% above consensus, led by mega caps. Margins drove most of the beat, as sales beat by 1%.“
For more on margins, read: Watch profit margins 👀
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 1.2% 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 🤔
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.
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%.
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.
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.
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.
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.
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%.