🎙️ Bargain Hunting

It was a pretty quiet, low-volume August Friday for markets, but make no mistake: The S&P 500 just clocked a 3% gain this week, its best week since November 2023. Japan’s Nikkei 225 added 3.6%.

Strong consumer spending and falling inflation have driven the latest rebound, putting the S&P about 2% from its mid-July record high. Nvidia, which corrected 28% from its high, led the way, soaring about 18% for its best week in over a year.

All in, the S&P 500 is up 17% in 2024.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Walmart cuts prices as inflation falls

• The latest with the art market

This, and more, in just 5 minutes to read.

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In The News

🛍️ Walmart Lifts Yearly Outlook as Shoppers Hunt for Bargains

Walmart is on a tear. The retail giant’s sales are climbing, pushing its stock to fresh highs this week after a 38% rally this year, compared to the S&P 500’s ~17% gain. 

Its latest earnings report showed strong revenue growth and continued e-commerce sales growth (22%). More important, Walmart raised its full-year guidance and said it’s gaining share across income cohorts, particularly upper-income households earning over $100,000 annually. 

By the numbers:

Walmart's revenue rose 4.8% to $169.3 billion and operating income increased 8.5% to $7.9 billion. The company's stock closed at an all-time high after the report. The company now expects:

• Net sales to increase 3.75% to 4.75% (up from previous 3% to 4% estimate)
  

• Adjusted earnings per share to reach $2.35 to $2.43 (up from $2.23 to $2.37)

Remarkably consistent: CEO Doug McMillon says the American consumer is doing just fine. "So far, we aren't experiencing a weaker consumer overall," he said.

• His CFO added, "Things have been remarkably consistent — I know everyone is looking for some pieces of information that maybe indicates further weakness with our members and our customers. We're not seeing it…Consumers want value. They want a broad assortment of items and services."

Selectivity: Walmart's outlook speaks to a shift in consumer behavior: Consumers are becoming more selective in their spending, but they’re gravitating toward essential purchases, particularly groceries, which Walmart offers. 

Meanwhile, consumers are cutting back on non-essential expenses like theme park visits, fast food meals, and premium coffee purchases. But they’re still spending at value-oriented retailers with competitive pricing. 

• Walmart groceries are sometimes priced about 25% lower than traditional supermarkets. It has also implemented numerous "rollbacks" or temporary discounts, particularly in the food category.

Why it matters:

At a high level, the report defies recession fears and highlights its ability to attract shoppers across income levels. 

• Growth in newer businesses like advertising and membership services shows Walmart's expansion beyond traditional retail, and Walmart's results also suggest consumers are still spending, though more selectively.
  

• To be fair, Walmart's good earnings contrast with other retailers’ challenges, like Home Depot, which reported weaker spending on home improvement projects. 

Save money, live better: For the most part, Walmart has kept its prices fairly low, maintained flat grocery prices, and worked with suppliers to lower prices, which benefits Walmart’s gross profits. 

Walmart is sticking to its slogan — save money, live better — to separate itself. As one analyst pointed out, “There is no denying that particularly for lower and lower-middle income households, the cumulative price increases we’ve seen in the last few years have definitely taken a toll.”

Read more

More Headlines

📈 Value investing could be due for a big comeback

🛍️ Consumer spending jumps in July as retail sales are better than expected

🏠 A record 8.5% of U.S. homes are worth $1 million or more

🤓 The folly of following markets on a daily basis: Zoom out

💄 Berkshire Hathaway invests in Ulta Beauty, Heico

💰 World's largest sovereign wealth fund posts $138 billion in profit

📉 Inside the death of the American magazine industry

☕ Starbucks is giving incoming CEO Brian Niccol $85 million

🎨 The Rich Can’t Sell Their Art, So They’re Borrowing Against It

Own some art? Many wealthier art owners looking to sell are running into headwinds. 

The art market itself has cooled. The May New York auction season fell about 23% by value from the previous year, driving many collectors to consider borrowing against their art rather than selling.

What to know: Wealthy investors are using their art collections as collateral for loans. Deloitte estimates that outstanding loans against art could exceed $36 billion in 2024, up from $29 billion to $34 billion last year and $20.3 billion to $23.6 billion five years ago.

• Deloitte’s art coordinator summed it up, "If you're an owner and need liquidity now, you pause on selling and instead borrow against your art, waiting for better market conditions."
  

• Major banks have been getting in on the fun, expanding their art lending services to attract and retain ultra-wealthy clients. Bank of America has seen new credit lines backed by art increase by more than 14% year-over-year. Its book of art loans recently hit a record high. The bank's art services group holds over 30% market share.
  

• The bank’s head of art services told Bloomberg: "Even in a higher rate environment, people are still taking advantage of timely opportunities," choosing to take out loans on their art rather than selling at a discount or liquidating stocks.

How it works: We aren’t talking about the middle class here, folks. To qualify for art loans at major banks, collections typically need to be worth at least $10 million to secure a loan of $5 million or more. Bank of America usually offers a 50% loan to value, with each piece worth a minimum of around $100,000. Citigroup looks for a minimum value of $200,000 per piece.

Why it matters:

Interest in art as an investment has soared since the turn of the century. And thanks to a bout of market volatility earlier this month, the subject is back in the news. Many investors look to art as a hedge and diversifying asset. 

The recent growth in art lending includes JPMorgan Chase & Co. Private Bank. A lending executive at the firm said, unlike stocks, art isn’t priced daily; pieces are valued annually, which tends to help investors emotionally. "We're not asking what the value of your Andy Warhol is every day,” she said. 

A sense of stability: Citigroup says its share of the art lending market is around 10% to 15%. The head of art finance at Citi Private Bank — now a title you see every day — said that even though rates are higher, art is a very stable asset over the long term, compared to other assets in terms of volatility."

Said one art executive: "There are margin calls, death, divorce, and bankruptcy, so we have endless interest for lending."

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Quick Poll

On Wednesday, we asked: Do you own Chipotle or Starbucks stock directly? Why or why not?

— Half of our readers own either Starbucks or Chipotle shares (or both). Chipotle is a $73 billion company, while Starbucks is valued at $106 billion. Wrote one Starbucks shareholder: “Justify buying my latte with the dividends I get, hopefully with the new CEO, dividends go up and prices go down, one can dream.”

— Said another: “I live near Seattle and really like Starbucks black coffee and walking into the shops. It's been on sale a few times, and I would consider today's prices at a small discount.” A third Starbucks investor said: “I love the coffee, the food, and the brand. I own what I like and use!”

— One investor who isn’t invested in either wrote, “Chipotle, I feel like I missed. Starbucks...I'm not interested. Too dependent on coffee, not to mention high-priced coffee. What happens in a world in which they say coffee beans have no future because of climate problems? As well as an increasingly stretched consumer?”

— Another said, “I considered buying both, but Chipotle was too expensive with a high P/E, and SBUX was having issues with sales, so I watched and waited. Now they are both too expensive!”

See you next time!

That's it for today on We Study Markets!

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