Market Pulse
Friday, August 2, 2024
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.
Our three stories this week:
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.
Consumer spending has long been the backbone of the U.S. economy, accounting for about two-thirds of overall GDP and exhibiting impressive resilience. Over the past year, for example, inflation-adjusted personal consumption has climbed 2.6%, despite persistent economic uncertainty. [1]
Recently, however, we’ve seen preliminary evidence that the resilience of the U.S. consumer is starting to come under pressure. Last week, McDonald’s registered their first quarterly global sales decline since 2020, driven in part by a 0.7% fall in U.S. sales. [2] UPS, long considered a bellwether for the broader economy, also significantly underperformed expectations this quarter on slower package delivery volume. [3]
Broader metrics are somewhat more encouraging. Despite any nascent consumer slowdown, the advance estimate for U.S. economic growth came in at a strong 2.8% in the second quarter. [4] Still, it remains to be seen how long the economy can keep outpacing expectations amidst a cooling labour market and rising consumer uncertainty. [5] [6]
We’re also seeing signs that struggling consumers downstream are starting to impact producers upstream. Manufacturers of a diverse range of goods including recreational vehicles, farm equipment, and household appliances have all shed jobs or shuttered factories in the wake of poor sales. [7]
Given that monetary policy works on a lag, we may well be seeing the results of increased interest rates finally work their way into the broader economy. While businesses and consumers have largely been able to shrug off higher financing costs so far, budgets can only take so much pressure before adjustments need to be made. Indeed, while the Fed decided to keep interest rates steady this week, the central bank’s next meeting in September could result in the start of a new cutting cycle to support the economy. [8]
Amidst this uncertainty, we continue to position Flagship defensively, focusing first and foremost on earnings quality. As the continued market rotation out of Big Tech shows, the time for aggressive portfolio positioning looks to have already passed. While a robust consumer has so far enabled the U.S. to avoid a recession, we can’t ignore the storm clouds brewing on the horizon.
When the SEC grudgingly approved the first spot Bitcoin ETFs earlier this year, it wasn’t clear whether the event would be a one-off or the start of a new trend. [9] With the successful launch of Ether ETFs last week, though, it’s safe to say that digital assets are increasingly entering the mainstream investment world. [10]
While crypto enthusiasts have long advocated for a way for investors to access tokens via traditional exchanges, regulation has been a significant hurdle. The SEC has taken a strict stance toward crypto, arguing that most tokens are unregistered securities that should be subject to traditional rules. [11] Events like the collapse of FTX and the imprisonment of founder Sam Bankman-Fried seemed to justify the SEC’s position.
Although crypto hype faded for a while in the wake of the FTX episode, it never disappeared completely. Earlier this year, the industry surged back to life, with Bitcoin prices hitting all-time highs and institutional players showing a renewed interest in tokenization. [12] Far from fading away, in fact, crypto policy is now playing an increasingly important role in the upcoming U.S. presidential election. [13]
The wave of crypto ETFs probably isn’t finished yet, with at least one fund manager submitting an application for a Solana-backed ETF. [14] While political and regulatory trends might support crypto prices in the near term, investors should remember that the bulk of these projects are highly speculative bets with little place in a fundamentally focused investment portfolio. Still, that doesn’t mean crypto technology as a whole should be ignored.
Several Flagship portfolio companies have taken an experimental approach to cryptocurrency, looking for ways to integrate tools like tokenization and the blockchain to deliver meaningful business results. Visa Token Services, for instance, provides an alternative digital payment avenue to traditional credit cards. [15] PayPal’s reserve-backed stablecoin, meanwhile, has a market cap of more than $500 million. [16]
In short, while digital assets appear to be going mainstream, that doesn’t mean all digital assets deserve a place in a mainstream portfolio. For investors, the key is to identify which digital assets can actually deliver value in terms of payment infrastructure and technology rather than mere speculation.
Companies continued to report Q2 earnings this week with several Flagship portfolio holdings posting impressive results. Here, we’ll take a look at those results and offer a few thoughts on each company’s future.
Pfizer posted strong results, exceeding earnings expectations by about 30%. [17] Despite declining demand for the company’s Covid-related treatments, cost-cutting measures and drug acquisitions contributed to profit growth.
In line with many tech companies this earnings cycle, Microsoft’s earnings disappointed investors due to the lack of an immediate AI payoff. Still, both earnings and sales slightly exceeded expectations, so such disappointment may be overblown. [18]
On the back of rising payment and transaction volumes, PayPal exceeded earnings forecasts by 21%. [19] In addition, the company upgraded guidance for the rest of the year on improving margins.
American Tower, a REIT focused on communications infrastructure, significantly exceeded expectations in Q2. [20] Funds from operations, a common profitability measure for REITs that adds back in depreciation and amortisation, exceeded analyst forecasts by 10%. Earnings exceeded forecasts by 21%.
[1] St. Louis Fed
[2] The FT
[3] Bloomberg
[4] The FT
[5] The FT
[8] The FT
[9] The FT
[10] Bloomberg
[11] Bloomberg
[12] Yahoo Finance
[13] The FT
[14] Bloomberg
[15] Visa
[16] PayPal
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