Mind the anecdata 🤏
Plus a charted review of the macro crosscurrents 🔀
The New York Giants appear to have a supply chain problem.
In a research note to clients Friday, Wells Fargo’s Christopher Harvey flagged a locker-room interview with Giants wide receiver Kenny Golladay from earlier in the week. Behind him was a printout notifying players “DO NOT GIVE YOUR GAME JERSEY AWAY OR SWAP IT… THE UNIFORM COMPANY WHO MAKES OUR JERSEYS CAN NOT MAKE ANYMORE FOR US THIS YEAR.”
It’s a funny anecdote.
It’s also the kind of anecdote that a market prognosticator might reference to support her priors that we are still in the throes of a global supply chain crisis.
However, this is what statisticians might characterize as a type I error, or a false positive.
In reality, most broad supply chain-related metrics (e.g., delivery times, inventories, freight costs, shipping capacity, inflation) suggest this crisis we were facing a year ago has subsided. [For more on this, read: “A bunch of charts showing how supply chains have improved⛓“ and “9 reasons to be optimistic about the economy 💪.]
Yes, there will be plenty of anecdotes suggesting otherwise. But this will always be the case for everything.
We can say the same thing about the high-profile, large-scale layoffs announced at big tech companies over the past year. Last week, Microsoft announced it would cut 10,000 jobs and Google-parent Alphabet announced it would cut 12,000 jobs.
There’s no question these are large numbers, and it’s a very difficult situation for those affected.
But according to Goldman Sachs research, there have been numerous instances when a spike in layoffs in the the tech industry — which represents less than 3% of total employment — did not portend widespread job cuts across the economy. [For more on this, read: “Don't be misled by no-context reports of big tech layoffs 🤨.“]
Unfortunately, it’s the case that many companies conduct many layoffs even during periods of economic growth. For almost two years, U.S. employers have laid off between 1.2 million and 1.5 million employees a month. Again, these are large numbers. However, these figures amount to just 0.8% to 1.0% of total employment, which is low by historical standards. Prior to the pandemic, this layoff rate never fell below 1.1%. [For more on this, read: “9 reasons to be optimistic about the economy and markets 💪.”]
These trends are confirmed by weekly initial claims for unemployment insurance, which are near the lowest levels of the current economic cycle.
The fact that unemployment remains low and job openings have been ticking lower from very high levels suggest many people being laid off are quickly finding work elsewhere.
Vox’s Emily Stewart said it well in an article published Thursday: “If a whisper of a layoff is the thing that goes bump in the night, tons of news stories about thousands of people at Big Important Companies being out of a job feels like the giant monster standing in your door ready to eat you. But all is not as it seems.“
The Atlantic’s Derek Thompson had an article on the topic Friday, noting that among other things tech was in a bubble in recent years. On Saturday, The Wall Street Journal highlighted that from 2019 to 2022, “the employee count at Amazon doubled, Microsoft’s rose 53%, Google parent Alphabet Inc.’s increased 57% and Facebook owner Meta’s ballooned 94%.“
[For more on this, read: “Beware alarming business stories that get a lot of news coverage 🗞️.“]
We certainly can’t rule out the possibility that significant layoffs could come to larger parts of the economy. However, the data suggest the pain is relatively isolated.
Anecdata isn’t totally worthless 🤔
Every couple of weeks, the Federal Reserve publishes its “Beige Book” of economic anecdotes. And it’ll include stuff like:
"A low-cost retailer reported that falling gas prices had driven stronger sales in December, but a high-end retailer exclaimed that 'December is not happening!'"
“Moreover, visits to major tourist attractions, such as the Statue of Liberty, have rebounded to pre-pandemic levels. While attendance at Broadway shows has been mixed, high-profile musicals targeted towards visitors have reportedly fared quite well.“
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.
So don’t dismiss the anecdata. Just be mindful.
Related from TKer:
The bullish 'goldilocks' soft landing scenario that everyone wants 😀
Stocks retreated, with the S&P 500 slipping 0.7% last week. The index is now up 11.1% from its October 12 closing low of 3,577.03 and down 17.2% from its January 3, 2022 closing high of 4,796.56.
Here’s a random stat courtesy of our friends at S&P Dow Jones Indices: “Happy Lunar New Year to those who celebrate! The year of the Rabbit will begin this Sunday (Jan. 22nd), and history may put a hop in investors’ steps in the coming year: based on data since 1931, the year of the Rabbit had the fourth highest average price return for the S&P 500 across the 12 animal signs in the Chinese Zodiac.“
File this one under spurious correlations. That said, it’s kind of fun to think about. Make sure to give grief to your friends and colleagues who were born in a year of the Snake.
Related from TKer:
Everyone’s talking about a near-term sell-off. A contrarian signal? 🤔
One of the most frequently cited risks to stocks in 2023 is 'overstated' 😑
Don't expect average returns in the stock market this year 📊
Reviewing the macro crosscurrents 🔀
There were a few notable data points from last week to consider:
📉 Wholesale price inflation is easing. According to the Bureau of Labor Statistics, the producer price index (PPI) in December was up 6.2% from a year ago. Excluding food, energy, and trade, core prices were up 4.6%. On a month-over-month basis, PPI was down 0.5% while core PPI was up 0.1%.
🛍️ Consumer spending is cooling. Retail sales declined by 1.1% in December. Excluding autos and gas, sales were down 0.7%.
A lot of the decline can be explained by lower gasoline prices as gas station sales fell by 4.6%. Still, weakness was broadly based with declines in furniture, electronics and appliances, health and personal care, and restaurants and bars.
🤔 Economists push back on the retail sales report. From BofA’s Michael Gapen: “Statistical distortion exaggerates retail slowdown.“
From JPMorgan’s Daniel Silver: “The December drop in retail sales probably exaggerates any underlying weakness for a few reasons. The data can be noisy from month to month, and there can be big fluctuations in the underlying figures around the holiday season that might be difficult to seasonally adjust for. There also was some harsh winter weather in December that may have weighed on activity. And looking ahead to January, a boost to social security payments associated with the annual cost of living adjustment should be meaningfully lifting incomes (and spending).“
From Renaissance Macro’s Neil Dutta: “…because retail sales are a nominal data point, the drop in consumer prices for durable goods will weigh on the retail sales data. When I deflate retail sales by commodities CPI (it makes no sense to do this with total CPI which includes housing services), I see that sales were flat over the month and up 1.4% annualized over the quarter, the strongest since Q2 2021. This is a reasonably good first pass approximation for real consumption on goods as our figure shows.“
🛠️ Industrial activity. Industrial production activity declined by 0.7% in December, with manufacturing output down 1.3%.
📉 Mortgage rates are coming down. From Freddie Mac: “As inflation continues to moderate, mortgage rates declined again this week. Rates are at their lowest level since September of last year, boosting both homebuyer demand and homebuilder sentiment. Declining rates are providing a much-needed boost to the housing market, but the supply of homes remains a persistent concern.“
While mortgage rates are still elevated, it’s important to note that 96% of outstanding mortgages have a locked-in rate that’s lower than the current market rate. For more on this, read: “You can make any piece of data look bad if you try 🔄.“
🏚 Home sales are cooling. Sales of previously owned homes declined 1.5% in December to an annualized rate of 4.02 million units. From NAR Chief Economist Lawrence Yun: “December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates. However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.” For more on this, read: “The U.S. housing market has gone cold 🥶“
💸 Home prices are cooling. The median home price fell to $366,900 according to the NAR, though it’s up 2.3% from a year ago.
💰 Mortgage applications tick up. From MBA’s Mike Fratanoni: “Mortgage application activity rebounded strongly in the first full week of January, with both refinance and purchase activity increasing by double-digit percentages compared to last week, which included the New Year’s holiday observance. Despite these gains, refinance activity remains more than 80% below last year’s pace and purchase volume remains 35% below year-ago levels.”
🛠 Builder sentiment gets less bad. The NAHB’s homebuilder sentiment index climbed to 35 in January from 31 in December. From NAHB chairman Jerry Konter: “It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales. The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”
💼 Unemployment claims remain low. Initial claims for unemployment benefits fell to 190,000 during the week ending Jan. 14, down from 205,000 the week prior. While the number is up from its six-decade low of 166,000 in March, it remains near levels seen during periods of economic expansion. For more on low unemployment, read: “9 reasons to be optimistic about the economy and markets 💪“
💼 New job postings jump. From Indeed Hiring Lab’s Nick Bunker: “Job postings on Indeed have declined so far this year, down 1.7% month-over-month as of January 13th. But new job postings have jumped, suggesting hiring appetites are stronger than the headline figure suggests.“ For more on job openings, read: “How job openings explain everything in the economy and the markets right now 📋“
🍾 The entrepreneurial spirit is alive. From the Census Bureau: “Total Business Applications in December 2022 were 417,055, down 0.3% (seasonally adjusted) from November 2022.“ Applications continue to trend significantly above pre-pandemic levels.
Putting it all together 🤔
We’re getting a lot of evidence that we may get the bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
But for now, inflation still has to come down more before the Federal Reserve is comfortable with price levels. So we should expect the central bank to continue to tighten monetary policy, which means tighter financial conditions (e.g. higher interest rates, tighter lending standards, and lower stock valuations). All of this means the market beatings are likely to continue and the risk the economy sinks into a recession will intensify.
However, we could soon see the Fed adopt a less hawkish tone if we continue to get evidence that inflation is easing.
It’s important to remember that while recession risks are 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.
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 terrible year, the long-run outlook for stocks remains positive.
For more on how the macro story is evolving, check out the previous TKer macro crosscurrents »
For more on why this is an unusually unfavorable environment for the stock market, read “The market beatings will continue until inflation improves 🥊“ »
For a closer look at where we are and how we got here, read “The complicated mess of the markets and economy, explained 🧩” »
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.
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%.
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.
700+ reasons why S&P 500 index investing isn't very 'passive'💡
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. From January 1995 through April 2022, 728 tickers have been added to the S&P 500, while 724 have been removed.
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.
When the Fed-sponsored market beatings could end 📈
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.
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.
'Past performance is no guarantee of future results,' charted 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. According to their research, 29% of 791 large-cap equity funds that beat the S&P 500 in 2019. Of those funds, 75% beat the benchmark again in 2020. But only 9.1%, or 21 funds, were able to extend that outperformance streak into 2021.
One stat shows how hard it is to pick market-beating stocks 🎲
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 22% of the stocks in the S&P 500 outperformed the index itself from 2000 to 2020. Over that period, the S&P 500 gained 322%, while the median stock rose by just 63%.
This whole thing is now moot after the Giants’ season-ending, 38-7 loss to the Philadelphia Eagles Saturday.