POP QUIZ

What was the average price of a gallon of gasoline in the U.S. in February 1999? (Scroll to the bottom to find out!)

IN THE NEWS

🤨 Profits are Booming — Why are Earnings Calls So Gloomy?

We’ve talked about this a few times recently, particularly for Big Tech companies, but investors haven’t loved this quarter’s corporate earnings reporting season, nor have business execs been particularly excited, either, despite solid results.

The disparity between sentiment and reality couldn’t be clearer — the financial data provider, Factset, finds that about half of the S&P 500 has reported earnings, of which 78% beat profit expectations, while the S&P 500 index is down almost 3% this month.

• As The Economist puts it, “The mood during the quarterly carnival of conference calls has hardly been celebratory.”

Doom and gloom: At Tesla, Elon Musk lamented how higher rates were suppressing car purchases, while the toymaker Mattel (maker of Barbie) isn’t optimistic about sales this Christmas

• Snapchat said advertiser spending has dropped off amid Middle East tensions, and the delivery firm UPS painted a bleak picture about spending on goods going forward, among many other downbeat corporate calls.

What’s happening: Companies are making more money, but they’re not selling more things. Instead, higher prices are offsetting declining sales volumes.

• To put our economist hats on for a moment, what really drives economic growth and improvements in the standard of living is exchanging more and more goods and services.
• So sturdy corporate profits are great for now, padded by higher prices, but that’s not a viable long-term plan for most companies.

Why it matters:

To put things in context, look at McDonald’s. The company reported a 14% jump in third-quarter revenue from last year, but that increase is mostly due to charging higher prices — foot traffic is actually down at its franchises.

• It’s the same story at Pepsi and Coca-Cola, where growth in 2023 is from price hikes, not selling more carbonated beverages and snacks.

So what? This translates to folks spending a larger percentage of their income on things than before, like McDonald’s and Coke, but you can’t spend more on everything you normally consume — as a fraction of your income — without draining your savings.

• That’s where some of the corporate angst stems from, with executives and investors alike wondering whether higher prices on declining sales volumes is sustainable, especially if people are exhausting their savings.
• And then you can imagine a spiral where spending falls off, and higher prices no longer offset a decline in sales volumes, spurring corporate layoffs, which leave Americans with even less money to spend, and so on.

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🇹🇷 Middle East Jitters Spill Into Turkey

U.S. stock indexes may not be reacting much to escalating conflicts in the Middle East, but one big economy where the issues are a little closer to home is feeling the pain: Turkey.

Turkish stocks have had their worst month in three years, with the Borsa Istanbul 100 Index falling 10%. October’s decline marked a sudden reversal in an otherwise booming year, where Turkish stocks had gained over 80% since May following a round of elections.

• Volatility measures are also surging as investors try to assess the fallout from the war between Israel and Hamas.

Turkey’s President Recep Tayyip Erdogan recently canceled a trip to Israel, opting to instead praise Hamas as “liberators,” according to Bloomberg.

• One trader commented, “Geopolitical concerns seem to have unnerved investors,” specifically foreign investors, as “panic among domestic investors…snowballed the move.”

Why it matters:

Foreign investors are leading the exodus from Turkish equity markets, pulling out a net $358 million this month.

Turkey is generally seen as a less stable place to invest (making it more vulnerable to geopolitical fears,) particularly considering the country’s massive inflation rate, estimated to be around 61.5% in September.

Meanwhile, Turkish savers can earn only 45% interest rates on their cash, pushing many into the stock market in hopes of preserving their wealth.

• Last week, sharp selling triggered two trading suspensions in Turkey’s stock market, with the country’s flagship airline, Turkish Airlines, contributing the most to declines amid a 6.2% fall.

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💵 Could This Year’s Hottest Investment Be Costly?

Cash is king — for now.

Money-market funds have been the talk of the town this year, and rightfully so. It’s been a while since virtually anyone could earn 5% simply by sitting on cash. After the March 2020 bear market, the fastest in history, then the 2022 bear market, many investors would rather sleep better at night and earn 5% (or more).

• Holdings of money-market funds are at a near-record $5.6 trillion. Even professional investment managers have about one-fifth of their portfolios in money-market funds.

No more TINA: Cash used to be trash, when for years, low-interest rates made dip-buying the best approach on Wall Street. For many, there was no alternative to stocks, which kept chugging higher since the March 2009 low. The expression “TINA” (there is no alternative) became a Wall Street aphorism.

• But with the possibility of higher rates for the foreseeable future, people have found safety in money markets.

Yet, there’s an opportunity cost, and investors could miss out on a stock market rally over longer periods.

• “Money-market funds are a rational place to be for the next six months. But over the long term, taking risks pays you more,” said one chief investment officer.
• To be clear, there’s no one-size-fits-all approach to investing, saving, and asset allocation. What works for someone might not work for others.

Slapped in the face: It’s worth noting that the S&P 500 is still up 8.5% this year despite the recent correction, and many tech stocks have recovered sharply from 2022. The S&P 500 has returned nearly 11% per year or about 3,500% since 1981.

• Many large money-market funds (but not all) charge 0.5% per year in fees. Broad stock funds, meanwhile, often charge less than one-tenth of a percentage point.
• “There’s a psychological component to seeing 5.5% in a money-market fund after stocks and bonds got slapped in the face over the past couple years,” said another chief investment officer.
• He added, “But if you take all your chips off the table, that’ll hurt you when the market recovers.”

Why it matters:

Of course, cash could still provide a nice return — currently yielding close to the S&P 500’s average annual return historically — while allowing investors to sleep at night, knowing their cash won’t fall 20% like a high-flying tech stock.

• It’s expected that the central bank will hold rates around this level for some time. Many Wall Streeters expect the Fed funds rate (the baseline for all interest rates) to be around 3% or 4% for the long run.
• “If we are delivering 4% returns in a world of two-and-change percent inflation, I think cash becomes a real asset class,” another investor said.

Bottom line: While cash offers a nice low-risk return now, stocks have usually been a good long-term bet.

• “There’s an old expression: you date cash, you don’t marry it,” one adviser said.

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TRIVIA ANSWER

The average price of gasoline in February 1999 was about $0.96. Prices have steadily risen since, aside from drastic price drops in late 2008, 2014, 2020, and 2022.