🎙 The Driver's Seat

Contrarian investing is a thing for a reason. One of the latest examples: Right as headlines emerged that the 60-40 portfolio is dead, bonds picked up the slack.

The U.S. bond market has rallied ~8% over the last five months, the biggest five-month gain since 1995. It’s the latest area of the market that is firing away – the S&P 500’s rise through September was its best performance through the first three quarters since 1997.

Another hot area? Gold (up ~29% in 2024), one of its best years on record, largely fueled by the rising geopolitical tension.

Have a great weekend, everyone.

— Matthew & Shawn

Here’s today’s rundown:

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

• U.S. hiring soars past expectations

• AI vs. human analysts

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

Chart(s) of the Day

Together With Money (Gold IRA)

Gold Hits New Peak as the Fed Cuts Rates

Following a bold 50 basis point rate cut by the U.S. Federal Reserve, spot gold reached a peak of 2,687 per troy ounce.

Experts predict that this bullish trend for the precious yellow metal may continue, so it may be smart to get in now before prices keep climbing.

_{*The information provided in this email is for educational purposes only and is not intended as investment advice.}

In The News

💼 U.S. Hiring Soars Past Expectations, Jobless Rate Falls to 4.1%

The September jobs report is in, with surprising results: The U.S. labor market is quite robust, far surpassing economists’ expectations. 

Key figures:

• Nonfarm payrolls increased by 254,000 in September, the highest in six months
  

• The unemployment rate fell to 4.1%, down from 4.2% in August
  

• Average hourly earnings rose 0.4% month-over-month and 4% year-over-year

Mixed signals: The strong report reflects a resilient economy, contradicting the continued fears of a slowdown. What recession? The employment surge came after a lengthy period of mixed signals — some indicators showed weakness, others showed strength.

• This report is expected to influence the Federal Reserve’s upcoming decisions on rate cuts. The data might reduce the likelihood of big rate cuts in November and December, though Jerome Powell and Co. will remain “data dependent” and monitor inflation, too.

Wage growth, baby: The acceleration in wage growth is noteworthy, for it could impact consumer spending and inflation expectations. The 4% year-over-year increase in average hourly earnings is the highest in four months.

Sector health: A variety of areas of the job market warmed up. Leisure, hospitality, healthcare, and government work continued to drive gains. 

• On the flip side, manufacturers cut jobs for the second consecutive month.
  

• The underemployment rate, which includes part-time workers seeking full-time employment and discouraged workers, fell to 7.7%, the first decline in nearly a year.

Why it matters:

The report could have political ramifications, namely for Vice President Kamala Harris as the U.S. presidential election approaches on Tuesday, Nov. 5. Some market strategists say the robust labor market could help counter concerns about job prospects and the high cost of living.

Dinger report: JPMorgan’s chief U.S. economist called it a “dinger” jobs report, reducing expectations among economists and investors that the Fed would make another big move following its half-point cut in September. 

• “Today’s report should also make the Fed’s job easier,” the economist wrote to clients. “We now anticipate a path of 25-basis-point cuts.”

It’s worth noting that recent worker strikes and Hurricane Helene could impact future job numbers — the next report will reflect the effects of a walkout by Boeing factory workers and Helene’s impact on the Southeast. 

Soft landing case builds: The job market looks improved for now, setting the stage for an easier path for the Fed.

As a Bank of America economist wrote Friday, “The sizable acceleration in September payrolls and the lower unemployment rate, coupled with broader strength in US economic data over the last couple of weeks add to signs of resilience and strengthen the case for a soft landing.”

Read more

More Headlines

📈 Tom Lee on 6,000 S&P 500 target: Setup into year-end has a lot of tailwinds

😬 Poverty in Argentina soars to more than 50% as government austerity bites

🤖 Meta, challenging OpenAI, has new AI model that generates video with sound

🚢 Dockworkers suspend strike after reaching tentative deal until Jan. 15

✈️ Spirit Airlines is considering filing for bankruptcy

📈 OpenAI's next step: Consider going public via IPO

🤔 AI Vs. Financial Analysts: Who Predicts Earnings Better?

The AI vs. human debate isn’t going anywhere, and a relatively new development suggests that artificial intelligence might already be better than humans in predicting the earnings of publicly traded companies. 

Researchers at the University of Chicago utilized OpenAI's GPT-4 Turbo, a large language model (LLM), to analyze standardized financial statements of over 15,000 companies from 1968 to 2021. 

How it worked: The AI was tasked with predicting whether a company's earnings would increase or decrease in the following year, estimating the magnitude of the change and its confidence in the prediction.

And? The results were striking. The AI model accurately predicted earnings growth or decline 60.35% of the time. When making predictions within a month of financial document release, human analysts achieved 52.71% accuracy.

• Even with updated predictions throughout the year, human analysts' accuracy peaked at 55.95%, falling short of the AI's performance.
  

• One of the researchers noted that "it's very important to have a human in the loop, of course," but that AI could potentially take "the driver's seat" in financial analysis, with humans overseeing the process.

Strengths and limitations: The AI's performance is particularly noteworthy given that it relied solely on financial data, without access to additional context that human analysts typically use. Yet the study revealed some limitations of the AI approach. 

For one, human analysts outperformed AI when evaluating smaller, unprofitable companies. Second, the accuracy of AI fell during periods of economic shock, such as the 2008 financial crisis and the COVID-19 pandemic.

Why it matters:

The research raises questions about the future role of human financial analysts. 

"Given that GPT outperforms human analysts in predicting future earnings, this finding raises the question of whether an LLM can largely replace a median human analyst," the researchers noted.

To demonstrate the practical applications of the AI's predictions, the researchers constructed theoretical stock portfolios based on the model's forecasts. The portfolios posted impressive returns, generating 12% annually in some models and outperforming the overall market.

Bottom line: The financial industry is on the cusp of transforming as AI advances. Yes, human expertise remains valuable, particularly in complex or unusual market conditions. But the integration of AI in financial analysis appears inevitable — and potentially revolutionary, especially given how early we are in the AI journey. 

Read more

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Quick Poll

On Wednesday, we asked: Do you plan to make any changes to your cash in money-market funds as the Fed cuts rates?

— Two-thirds of investors who responded said they plan to reduce the cash in their money-market funds as the Fed cuts rates. “Reduce them significantly,” one said. “If the interest goes down to 3%, cash is only good if you need funds immediately,” another believes.

— One investor will reduce their cash holdings but put some to work, writing, “I always have some cash in case a good investment opportunity comes up.”

See you next time!

That's it for today on We Study Markets!

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