By Matthew Gutierrez, Shawn O’Malley, and Weronika Pycek
Yikes: Amid 2023’s surprise travel boom, hedge funds have lost $6 billion betting against cruise lines, hotels, and related stocks like Airbnb 🏝️
They underestimated the resilience of U.S. consumers in the face of higher interest rates and recession fears.
💭 Another area of resilience: The labor market, which keeps chugging along. Plenty more on that below.
— Weronika, Shawn & Matthew
Here’s the rundown:
Today, we'll discuss the three biggest stories in markets:
What’s driving low unemployment and high productivity
Amazon crushes earnings, Apple slips
American stock market exceptionalism
All this, and more, in just 5 minutes to read.
POP QUIZ
CHART OF THE DAY
IN THE NEWS
💪 Unemployment Rate Falls to 3.5% (WSJ)
Photo from Unsplash
The labor market is on a roll.
The U.S. economy added 187,000 jobs in July, and the unemployment rate fell to 3.5%, near a half-century low. Wage growth held steady.
That 187,000 job figure was weaker than forecasts, though, as the labor market cools slightly after nearly 18 months of interest rate hikes.
The still-strong but cooling labor market is an encouraging sign that the Federal Reserve is progressing in its fight against inflation without damaging the economy or job market. Unemployment fell to 3.5% in July from 3.6% in June, remaining near a half-century low.
Payday: Meanwhile, employers raised pay at the same rate as June, with average hourly earnings up 4.4% in July from a year earlier, well above the pre-pandemic pace.
Bigger picture: Job growth has been forecast to slow as the Fed raises rates to reduce inflation. “We have to be honest about the historical record, which does suggest that when central banks go in and slow the economy to bring down inflation, the result tends to be some softening in labor market conditions,” Fed Chair Jerome Powell said last month.
By almost all accounts, the proverbial soft landing scenario is still intact. Notes one economist: “The job market is still on a slow but steady path toward a soft landing,” when inflation returns to the Fed’s 2% target without causing a recession and high unemployment.
Hiring has slowed to near the lowest pace of the pandemic recovery, which was swift after the spiking 14.7% unemployment rate in April 2020. Last year, employers added around 400,000 jobs a month, a robust clip.
Best outcome: The Fed wants to keep reducing inflation without crushing the labor market. Basically, officials want a decrease in worker demand without increasing unemployment. No sweat, right? Unemployment remains remarkably low. Knock on wood.
Why it matters:
Friday’s unemployment report could mean less pressure on the Fed to raise rates at its September meeting. Upcoming July and August inflation readings also will inform their decision, but the labor market’s continued strength is noteworthy.
No ups and downs: Atlanta’s Fed president Raphael Bostic said he didn’t think the central bank needs to keep raising rates, citing the strong-but-cooling labor market and falling inflation.
“I’ve never expected this to move in a straight line,” he said this week. “I figured there’d be bumps up and down.”
More work to do? A senior economist at Vanguard begged to differ, arguing that steady wage growth “remains concerning,” adding: “There are signs of softening in the headline numbers, so that is progress, (but) the Fed is not going to be complacent about (wage growth). We believe they have more work to do” in fighting inflation.
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📈 Amazon’s Growth Shines, While Apple’s Slumps (WSJ)
The companies that seemingly run our lives, Amazon and Apple, posted earnings on Thursday. All eyes were on the tech behemoths, whose shares have risen sharply this year.
Amazon thrived in the latest quarter, driven by strong performance in its core e-commerce business, while Apple’s revenue declined to mark the company’s longest sales slump since 2016, the year Warren Buffett started buying up shares.
In numbers: Amazon sales surged, and its stock followed, jumping over 8% today. It posted $134.2 billion in revenue, year-over-year growth of 11%, sending the share price almost 10% higher Friday (+64% YTD).
Apple's revenue declined 1.4% as iPhone sales missed estimates, falling 2.4% to $39.7 billion, and iPad sales dropped 20%.
Apple services revenue (think Apple Music, iCloud, the App Store, Apple TV+) hit $21 billion as it eclipsed one billion paid subscriptions, a critical piece of its flywheel in motion. Apple’s paying subscribers now double Disney+, Netflix, HBO, and Peloton subscribers combined. That services growth drove overall profit to rise 2.3% to $19.9 billion.
Amazon, meanwhile, registered $6.7 billion in profit, a swift turnaround from its $2 billion loss a year ago.
Amazon's cloud-computing business, a major profit driver, has slowed as business customers remain cautious about their spending,.
“Every company in the world is trying to save as much money as they can,” Amazon CEO Andy Jassy noted. (Recall, it’s Meta’s “Year of Efficiency.”)
Why it matters:
2023 has been dominated by Big Tech, Amazon, and Apple included. Apple's impressive run drove its stock to a new record high this summer, while Amazon shares sit about 30% below its mid-2021 peak.
Apple subscriptions have doubled over the past three years, which its CFO said means “economic activity is good.”
He added: “For us, services are a leading indicator of the strength and health of our ecosystem. It means that our customers are very engaged with our devices.”
Apple CEO Tim Cook acknowledged that the past months have been challenging, referencing supply chain disruptions in China and high inflation that impacts hardware device sales (iPhone, iPad, Mac).
Cook-ing up growth: He also noted Apple's exceptional performance in emerging markets last quarter, highlighting India as its next large opportunity. He hopes rising sales in India will soften the impact of falling iPhone sales in China.
Said Cook: “If you look at it, it’s the second-largest smartphone market in the world. It’s a huge opportunity for us, and we’re putting all of our energies in making that occur.”
MORE HEADLINES
🏦 Elon Musk says Treasury Bills are “No-Brainer”
🛩️ American travelers are shunning the U.S. for Europe
🍲 Tupperware may not go out of business after all
✂️ Google’s parent company cut its stake in Robinhood by 90%
🇺🇸 Can American Stocks Continue Their Exceptionalism? (FT)
Photo from Unsplash
America loves to be number one. And in stock investing, it has been.
U.S. stocks outperformed their peers in the last 12 out of 13 years, says Rebecca Patterson, the former chief investment strategist at the hedge fund Bridgewater Associates.
Why? To stock investors, two things arguably matter most: Profit growth and certainty. Corporate profits underpin stocks’ valuations, and the more certain you can be in a company’s continued profitability, the higher premium you should be willing to pay to own that stock.
If a company’s business model is riskier or operates in a region that’s less politically/economically stable, investors will pay less for a dollar of its earnings (lower price-to-earnings ratio) because of that added uncertainty.
To its advantage: The U.S. has a robust financial system, independent regulators, a vibrant startup ecosystem, leading research universities, bountiful natural resources, and two oceans protecting it from adversaries.
That all helps make it a safer, more certain (and profitable) place to invest, hence the premium its stocks tend to trade at versus international alternatives.
But Patterson wonders if “U.S. equities (can) dominate for another decade?” At first glance, she thinks probably not.
Exceptionalism is usually unsustainable: Stocks in certain countries or sectors will typically perform well for several years. Eventually, their stocks trade at such a premium to others that they stagnate while others catch up in performance.
For example, U.S. stocks dominated the world in the 1990s until its early internet-era tech bubble peaked, passing the outperformance baton to China after it joined the World Trade Organization.
Is this time different? Patterson thinks the U.S. economy will benefit hugely from technological breakthroughs like artificial intelligence, helping American companies maintain their outperformance.
She comments, “Nobel Prize winner Harry Markowitz famously said, “‘the only free lunch in finance’” is diversification…and “that meal might taste better with an abundant helping of U.S. stocks” in the coming years.
Why it matters:
While the world broadly faces a shortage of workers and aging populations, the U.S.’s lead in AI offers a unique advantage, according to Patterson.
She cites a recent report by Goldman Sachs, which claims generative AI could boost productivity enough to raise the U.S.’s GDP by an extra 1.1 percentage points for ten years.
Whereas many other countries and their stock market indexes depend heavily on cyclical manufacturing and materials companies, the U.S. “has more than double the weight on technology compared with peers.”
Put differently: Software companies tend to be very profitable with stable, lean business models (high degrees of certainty), even during recessions. So, a global slowdown hitting cyclical businesses hard would bode well for America’s stock indexes relatively, which rely more on tech firms.
Over shorter periods, other stock markets may outperform the U.S. But when all is said and done this decade, Patterson makes an interesting case for continued American stock market exceptionalism.
TRIVIA ANSWER
See you next time!
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