🎙 End of an Era

The U.S. savings rate is historically low. The rate fell to 2.9% in July, 4.5% below its pre-pandemic average and just a tick above its historical lows in 2005-07 before the Global Financial Crisis.

As today’s chart of the day shows, the low level does raise some concern over how sustainable all this consumer spending will be. While household wealth has ballooned, a growing number of households don’t have much wiggle room, either.

On the flip side, some say the low savings rate is simply a result of peoples’ net worths rising, thanks to soaring 401(k) accounts and the rise in the value of homes. When you feel richer on paper, maybe you don’t feel so bad about spending most of your income.

— Matthew & Shawn

Here’s today’s rundown:

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

• Previewing the big week for central banks

• The rise of Palantir

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

Chart of the Day

Together With Betterment

We put your money to work

Betterment’s financial experts and automated investing technology are working behind the scenes to make your money hustle while you do whatever you want.

Learn more

In The News

💡 Setting the Stage for a Big Week for Central Banks

This is the week. It’s a big one: The Federal Reserve’s rate cuts are upon us. In the coming months, those rate cuts will ripple through the economy, from businesses to home and car buyers to everything in between. But we won’t know to what extent the cuts will affect things. 

Milton Friedman likened changes in Fed policy to “a water tap that you turn on now and that then only starts to run six, nine, 12, 16 months from now.”

The big question: Will officials cut rates by 0.25 percentage points or 0.5 points this week?

• This situation is unique, though, because rate cuts usually come during more troubling economic periods. On the surface, this economy is pretty good, with a cooling but decent labor market and an economy posting stable growth.
  

• “We don’t have a lot of examples of cutting in a healthy economy, in one that’s not showing serious signs of distress,” a former senior special adviser to Fed Chair Jerome Powell told The Wall Street Journal. 

Setting the table: Things would be different if the Fed needed to jolt a decelerating economy, one with a much worse labor market, stalled business growth, and a plunging stock market. But that isn’t the case, so lower interest rates could boost spending a lot faster. 

Starting in March 2022, the central bank raised rates 11 times to reduce skyrocketing inflation. That put its target from virtually zero to about 5.4%. Futures markets show investors think the Fed will cut its target range by 1.25 percentage points this year and another 1.25 points in 2025. 

The impact gets a little nuanced, but it’s not the cuts themselves that people will feel — it’s the expectation of cuts. Mortgage rates and intermediate to longer-term CD rates have already come down, for example, due to projections of rate cuts. So people would already be feeling the effect of cuts to some extent. And they will feel it even more, if more cuts come than is currently forecasted.

Finding the ideal range: Models out of the Atlanta Fed indicate that the ideal level of rates is in the 3.5% to 4.8% range. That sort of reduction seems minor at first glance, but it could be pretty drastic. We won’t be able to earn as much on our cash, for example, but credit card and mortgage rates should fall, and small businesses with floating-rate loans should see savings on their interest payments, too.

Why it matters:

The effect of rate cuts has already shown up: The 10-year Treasury has fallen to about 3.6%, a full percentage point below where it stood in April, and well below the 5% mark it reached last October. That 10-year yield impacts mortgage rates: The average 30-year mortgage rate has fallen to 6.2%, down from 7.2% in May. 

Housing affordability remains a big issue, with prices still very high. Mortgage rates will likely have to keep coming down to jolt the housing sector. 

Game of Tones: As the Financial Times reports, Powell and Co. have a decision to make. Should they play it cautiously with 25 basis points? That would put more burden on subsequent rate-cutting decisions. 

• It would also be “a dovish tone that emphasizes the need for cuts in the final quarter, outlines the path beyond, and mentions the Fed’s willingness to make chunkier cuts if needed, which could help send the right signal to markets.”
  

• The U.S. presidential election is a day before the Fed’s next meeting in November. Still, policymakers will be wise to ignore politics and focus only on what is certain: the economic data. But even that is complex, ever-changing, and confusing. 

Inexact science: As for a more aggressive rate cut of 50 basis points? That would be a powerful signal. Here’s the FT: “Central banking is an inexact science. Yes, uncertainty warrants caution, but it also means taking out the right insurance when possible. A 50bp cut this week safeguards against overly restricting the economy and adverse market reactions to any weak data releases before its next meeting.”

Read more

More Headlines

💰 Drugmakers bet billions that targeted radiation could become the next cancer breakthrough

📉 Chinese stocks hit a new low 

💭 The end of an economic era 

✈️ Boeing implements hiring freeze, cost-cutting amid strike

💼 Amazon is making its employees come back to the office five days a week

📈 The Rise of Palantir Stock

What a ride it has been for Palantir. Shares in the data analytics company, set to join the S&P 500 later this year, have more than doubled this year. 

CEO Alex Karp founded the company two decades ago. The stock has been up about 300% since it went public in the fall of 2020 via a direct listing, when a company starts trading on an exchange on a set day. (With an initial public offering, or IPO, companies team up with investment bankers and reserve shares for money managers.)

It doesn’t have Tesla's cult following. Still, Palantir has become a favorite among individual investors—its Reddit forum boasts about 60,000 members—and many post memes about the stock on social media. 

Courageous investing: Individuals own about half of Palantir’s shares, a higher portion than most companies, including Tesla. Karp said Palantir’s investors are “courageous enough to invest their own money…in what they believe in.”

The lifeblood: Palantir’s stock could keep rising. Usually, stocks added to the S&P 500 get a nice boost because index funds that manage trillions of dollars of assets buy shares to match the index’s composition. Palantir shares, up seven consecutive sessions, have risen over 20% since the S&P 500 announcement.

• Many Palantir investors have large positions in the company. For some, it’s half (or more) of their stock portfolio, replicating a similar concentration to that of superfans in stocks like Tesla and Nvidia. Many are drawn to Palantir’s pro-American stance — it does not work with countries like China and Russia.
  

• “Institutional investors thought Palantir was never going to be a relevant enterprise player,” said an analyst at Wedbush Securities who is bullish on the stock. “Retail believed, and that was the lifeblood of Palantir.”

Why it matters:

Palantir, named after a crystal ball in the Lord of the Rings, was founded in 2003 by a group including Karp and Chairman Peter Thiel, who wanted a new software to mitigate terrorism. In the beginning, Plantir worked with U.S. intelligence and defense agencies, and now, it sells data analytics software to governments and businesses worldwide. Its software is being utilized by U.S. allies in the wars in Europe and the Middle East. 

Corporate clients (roughly 600) include United Airlines and BP. Last year, it launched an AI platform that has coincided with the latest surge in its stock. But it was not profitable until late 2022. Palantir trades at roughly 25 times its expected sales over the next year and has relatively low institutional ownership. Its market capitalization is about $82 billion. 

• “You’re effectively trading at a level that’s unsustainable,” said one analyst.

Is it not just another meme stock? Investors bullish on the stock say it will continue to grow earnings rapidly, and the seemingly high valuation is warranted. Revenue is accelerating, as is free cash flow. 

• “It’s not a meme stock,” said one individual investor who makes videos about the stock. It would be something if the Department of Defense were to use a meme company.”

Read more

Sponsored by FNRP

Your Bridge to Commercial Real Estate

Sometimes, who you invest with matters more than what you invest in.

Signing up with FNRP is simple and only takes a few minutes. After filling out a brief qualification survey, you’ll gain access to our deals. Once you have access, you can review and research our offerings at your convenience without high-pressure sales tactics or marketing gimmicks.

Quick Poll

On Friday, we asked: Does the slowdown in share repurchases by Berkshire Hathaway affect your view of the stock?

— More than half of investors said the slowdown in Berkshire Hathaway buybacks doesn’t impact their view of the stock. “I bought my first share in 1994, decades prior to any buybacks,” one investor said. “Those who try to time Berkshire always end up out of the stock at the wrong time.” Another wrote: “No, I think long term.”

— As for investors who are impacted, they said, “It has already been said best: ‘Why would you be buying Berkshire, if Buffett is not.’ Berkshire is one of the very few companies that actually succeed at buying back shares at a relatively low valuation. Most companies end up buying back more shares during boom periods, when both cash flows and valuations are elevated... destroying more shareholder value than average taxes paid on dividends would.”

— Said another: “If it’s too expensive for Mr. Buffett, it’s too expensive for me. I’ll wait ”

See you next time!

That's it for today on We Study Markets!

Enjoy reading this newsletter? Forward it to a friend.

Was this newsletter forwarded to you? Sign up here.

Use the promo code STOCKS15 at checkout for 15% off our popular course “How To Get Started With Stocks.”

Advertise with us.

Follow us on Twitter.

Keep an eye on your inbox for our newsletters on weekdays around 6pm EST and on weekends. If you have any feedback for us, simply respond to this email.

You can also leave your comments/suggestions/feedback anonymously here.