By Matthew Gutierrez and Shawn O’Malley
🔥 Financial stocks are hot. The XLF, or Financial Sector ETF, has risen about 18% this year and 31% over the past 12 months. While its five-year return (70%) has underperformed the broader market, financial stocks have become one of the more popular sectors for hedge funds this year.
Meanwhile, most stocks rose Friday after Fed chair Jerome Powell signaled that interest rate cuts are coming.
“The time has come for policy to adjust,” Powell said during the Fed’s annual retreat this week in Jackson Hole. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
— Matthew & Shawn
Here’s today’s rundown:
Today, we'll discuss the biggest stories in markets:
Howard Marks chimes in on Mr. Market
Checking in on Generation X
This, and more, in just 5 minutes to read.
POP QUIZ
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In The News
💡 Howard Marks Weighs In: Mr. Market Miscalculates
Howard marks, 78, is the co-founder and co-chairman of Oaktree Capital Management, the largest investor in distressed securities
With the dust settled after a bump stretch for stocks, investing legend Howard Marks has chimed in.
The Oaktree Capital Management co-founder noted in a recent memo that markets aren’t always rational, often swaying from one extreme to another. But for smart investors, that presents opportunities, especially when “Mr. Market” miscalculates, a metaphor he borrowed from Benjamin Graham.
Laundry list: Marks said that investor psychology and emotional behavior drive a lot of market action; it’s not all about economic data or earnings, particularly in the short term.
“Volatile psychology, skewed perception, overreaction, cognitive dissonance, rapid-fire contagion, irrationality, wishful thinking, forgetfulness, and the lack of dependable principles. That’s quite a laundry list of ills,” Marks said.
Marks added that the worst thing any investor can do is react to irrational tendencies in the market and join the frenzy, whether out of FOMO, envy, or something else.
“It’s far better to watch with bemusement from the sidelines, buttressed by an understanding of how markets work,” he added. “But better still to see Mr. Market’s overreactions for what they are and accommodate him, selling to him when he’s eager to buy regardless of how high the price is, and buying from him when he desperately wants out.”
Why it matters:
Marks’ memo comes on the heels of the S&P 500’s three-day slide — Aug. 1, 2, and 5 — that totaled a 6.1% decline. Most headlines centered on a Bank of Japan interest hike; the Yen carry trade, and renewed recessionary fears after a jobs report.
Moody: Marks said the real underlying driver was much different: investor panic.
“Mood swings do a lot to alter investors’ perception of events, causing prices to fluctuate madly,” he wrote. “When prices collapse as they did at the start of this month, it’s not because conditions have suddenly become bad. Rather, they become perceived as bad.”
Emotion? No. Marks also pointed out that there appears to be a tendency to overlook certain economic data points and a tendency to interpret news that fits a narrative.
“What this means is that in good times, investors obsess about the positives, ignore the negatives, and interpret things favorably,” Marks wrote. “Then, when the pendulum swings, they do the opposite, with dramatic effects.”
“It’s the primary job of the investor to take note when prices stray from intrinsic value and figure out how to act in response,” he concluded. “Emotion? No. Analysis? Yes.”
Final words: Added Marks: “Given Mr. Market’s inconsistent behavior, the prices he assigns to stocks each day can diverge – sometimes wildly – from their fair value. When he’s overenthusiastic, you can sell to him at prices that are intrinsically too high.
“And when he’s overly fearful, you can buy from him at prices that are fundamentally too low. Thus, his miscalculations provide profit opportunities to investors interested in taking advantage of them.”
More Headlines
🙏 Who was Mike Lynch, tech entrepreneur who died after superyacht sank?
🚲 Peloton stock soars after narrowing Q4 losses, boosting sub growth
🍲 Cava sales jump as fast-food diners flee price increases
🤖 Three-quarters of founders in the latest YC cohort are working on AI startups
✈️ Starbucks gives new CEO Brian Niccol a private jet for his commute
🍷 Europe’s wineries battle to survive as extreme heat hurts production
💼 Labor market weakness shows signs of 'leveling off'
😬 As Generation X Approaches Retirement, Reality Bites
Gif by IntoAction on Giphy
Generally, Baby Boomers are doing well, controlling most of the wealth out there. As for Generation X? Not so much.
The older Gen Xers are turning 60 next year, and many say they won’t be able to retire anytime soon.
Americans born between 1965 and 1980 experienced drastic shifts in how the economy operates, notably in technology. They also experienced a big shift from pensions to 401(k)s.
Meanwhile, many Gen Xers were hit especially hard during the 2008 financial crisis, just at the prime of their careers. Others are paying off piles of student debt and navigating care for their aging parents. Few of them told The Wall Street Journal that Social Security will be enough to make ends meet.
What retirement? One 55-year-old profiled by WSJ is a microcosm of a broader theme. He earns about $35,000 annually as a busy driver in Georgia, doesn’t own property, and has about $100,000 in retirement savings. It’s a much different situation than that of his parents, who worked for the local sheriff’s department and the post office. Those jobs enabled them to steady pension checks when they retired.
“As long as my body will let me, it’s better I keep working,” he said.
Forgotten: The roughly 65 million Americans in Gen X are sometimes called the “forgotten generation” between the larger and louder baby boomer and millennial generations. They’re also called the “latchkey generation” since they often come home from school as children to an empty house. In a recent report, Goldman Sachs Asset Management called Gen X the “‘401(k) experiment’ generation.”
Worse off? By some measures, Gen Xers are worse off financially than baby boomers. The median household net worth of Gen Xers between 45 and 54 years old was about $250,000 in 2022, about 7% lower than that of baby boomers at the same age in 2007, according to inflation-adjusted Federal Reserve data. Gen Xers are the only group that saw a drop in median wealth over that period.
From The Wall Street Journal
Why it matters:
For years, companies gave loyal workers traditional pensions with set payouts throughout retirement. But the 401(k) system put retirement finances into individuals’ hands, which didn’t bode well for some.
“Gen X is the first generation where they were mostly expected to figure out their retirement on their own,” said one economics professor. (Today, private pensions are rare.)
Off-target: Gen Xers aged 45 to 54 had a median account balance of about $60,000 in their retirement plans, per Vanguard. For nearly everyone, that is far below what they believe is necessary for retirement. Many financial experts recommend having about six times one’s salary saved by age 50.
Plus, about 25% of Gen Xers had education loans in 2022. High rents, soaring education costs, and other inflationary pressures have weighed more on Gen X than other generations, according to economists.
As one Gen Xer summed it up: “I fully expect to work until I die. It is what it is.”
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Quick Poll
On Wednesday, we asked: Do you own shares in Netflix? Why or why not?
— One Netflix shareholder wrote, “When it got cut in half last year, I couldn't pass it up. As a user, no one else can keep up with the amount of content they put out. They were also, to my knowledge, really the only streaming service that has pulled off an international platform. Paramount and HBO are on their graves, as with all the other small players. Amazon, Apple, Netflix, and Disney (which has its own problems) will be the only players.”
— Said another: “I was intrigued by the company and bought some shares. I don't own much, mostly because I am scared it is overvalued. In hindsight, I wish I owned much more right now, but I am still scared it's overvalued. Won't know until the future if the discomfort is warrranted.”
— One investor appears to have taken a page out of Peter Lynch’s playbook: “Since my kids enjoy watching this, I bought the stock. Great luck to have done so.”
— Added another: “Bought the 2022 dip. No one with a Netflix account is giving that up.”
TRIVIA ANSWER
See you next time!
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