Market Pulse
Monday, July 31, 2023
Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
In this week’s edition we have 3 stories:
Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.
Adrian (Portfolio Manager), and the rest of the Sidekick team.
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
If there are market gods, they must have laughed at us last week when a combination of policy decisions, economic data and companies' earnings were all released within a few days. The US Fed on Wednesday, the European Central Bank on Thursday, the Bank of Japan on Friday, China's politburo meeting, European PMIs, US Q2 GDP... not to mention company earnings: only about 350 of them between Monday and Friday including mega-caps Alphabet, Microsoft and Meta.
Here's what we learned....
The US Fed made another expected move, raising rates by 25 basis points to the 5.25% - 5.5% corridor [1], marking the highest level in 22 years [2]. Fed Chairman Jerome Powell hinted that the end of the hiking cycle is on the horizon [3], although he gave himself plenty of room to change his mind if new data warrants it.
The crucial question is how these higher rates will impact US households and companies. An old rule of thumb is that it takes around 18 to 24 months for higher rates to be felt in the real economy, but recent evidence suggests that this time frame may have shortened to just one year [7]. The window for accurately predicting a recession caused by high-interest rates is thus rapidly closing as the current cycle started in March 2022.
Surprisingly, the data points in the opposite direction, with US consumer spending at all-time highs [4], the housing market bouncing back [5], equity markets rallying [8], and bearish strategists issuing mea culpas [6]. So, why has the recession yet to materialize?
A plausible explanation lies in what renowned investor Ray Dalio termed a "Beautiful Deleveraging [9]. It involves carefully managing debt payments without causing major economic disruptions.
Following the Great Financial Crisis of 2008, we've experienced a long period of Beautiful Deleveraging, thanks to the Fed's accommodative rate policies. These policies have significantly bolstered household finances to record levels [10], and the pandemic stimulus shock further strengthened this trend.
Consequently, the US economy now shows less sensitivity to interest rates than a decade ago, potentially explaining why the Fed can confidently raise rates to record highs without causing havoc in company and household balance sheets. If this explanation holds, brace yourself for a wave of mea culpas from those anticipating a severe recession.
One exciting thing about earnings season is that it shows us companies as they really are instead of how we want them to be. Even more interesting is when companies report better numbers, but investors react negatively, a sign that valuations are stretched. On the other hand, when companies disappoint but share prices remain resilient, it can be an excellent time to hunt for opportunities.
With half of the S&P500 having reported so far, close to 60% of the companies beat expectations on sales and about 80% on earnings. The magnitude of the positive surprise is almost 2% on sales and close to 6% on earnings. Good news overall.
Yet despite Meta and Alphabet making the headlines last week with their positive share reactions, on aggregate, companies have suffered a -1% decline on reporting day. Consumer Staples and Communications did even worse, despite posting bigger positive surprises:
We shouldn't jump to immediate conclusions. It's only half of the picture, after all. Still, the market is unimpressed by second-quarter earnings beats so far. This means valuations may be slightly ahead of fundamentals, or investors' expectations may be ahead of sell-side analysts. Whichever the case, we should be diligent when picking stocks in the months ahead.
One of the companies reporting financial earnings last week was Mattel, the toy company behind the Barbie doll cultural phenomenon. The report only included company finances up to June, so we have yet to see the effects of the blockbuster film released earlier this month.
Over the years, Mattel has introduced Barbie dolls promoting STEM careers, inspiring girls to pursue fields like medicine, engineering, and science [11]. They should also consider investment management.
The disposition effect refers to investor’s reluctance to sell assets that have lost value and a greater likelihood of selling assets that have made gains [12]. Besides affecting performance negatively, the disposition effect can also lead to overconfidence.
In a lab experiment with 301 investors [13], some were forced to sell winners and others to sell losers, then asked to rate their performance compared to others:
The chart above suggests that when forced to sell winners, both men and women tend to believe their performance was above average, even if it wasn't. However, while around 50% of women rated themselves above average, which is expected, men tended to rank themselves even higher. This led the authors to conclude that the disposition effect leads to overconfidence.
In an industry where overconfidence can be so detrimental, the case for greater female representation couldn’t be stronger. Mattel should take notice and launch a Stock Picker Barbie.
[1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20230726a.htm
[2] https://fred.stlouisfed.org/series/FEDFUNDS
[3] https://www.youtube.com/watch?v=jiYXLox_Ejo&ab_channel=CNBCTelevision
[4] https://tradingeconomics.com/united-states/consumer-spending
[5] https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index
[8] https://www.ft.com/content/79df886e-4b74-480c-a143-0f8343ffe643
[10] https://fred.stlouisfed.org/series/TDSP
[12] https://www.jstor.org/stable/2327802
[13] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4416786&utm_source=substack&utm_medium=email
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Sidekick is not yet regulated but has applied to the FCA for authorisation to operate. Prior to Sidekick becoming fully authorised, none of the information provided is intended as an invitation or inducement to apply for any Sidekick product or service.
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