A few things. First, the momentum trade in artificial intelligence (AI) stocks has reversed, at least temporarily. This could be a simple technical pull-back but it may suggest investors are becoming more discerning about the profit contribution of AI, instead of just being excited about the promise of unlimited robots creating a life of leisure for humanity. Second, the replacement of Biden with Harris has injected some uncertainty into the outcome of Presidential contest while increasing certainty that the process will be disruptive. Third, and this is the most important factor, fraying economic data has increased concern that the Fed has waited too long to lower interest rates. Let’s examine this last point a bit:
Friday’s job report showed only 114K jobs created in July, below estimates for 175K new jobs. Is this a big deal? The latest figures show 133 million full-time employed people in the U.S. Therefore, job gains in July are equivalent to a change of 0.0001%. The difference between the forecast and the actual job creation figure in July is equal to 0.00005% of total full-time employment. Imagine, in your job, if you had to do anything with this level of precision. It’s not possible. From this it follows that nearly any reaction in individual stocks to the monthly jobs report is an overreaction.
That said, the jobs data is not being reported in a vacuum, and the context here matters. Job creation is trending lower. If it continues in this respect, it could turn into a problem. There are also numerous individual data points from the consumer that suggest spending is slowing. In an email this week from a national retailer I follow, the company explained its tepid outlook for the balance of 2024 by saying “We think there is consumer fatigue across lower and middle income.” Notable here is their inclusion of “middle income”. The large retailers you visit typically have a lot of data about their consumer and can zero in on behavior by income as well as other factors. Starting in early 2023, many retailers reported weakness among lower-income consumers. It has spread.
But wait, wasn’t slowing spending and job creation the whole point of the current higher interest rates in the first place? Yes! We got ourselves into this mess with too much stimulus as Covid lockdowns wound down. Demand surged and there were not enough workers to fill the available jobs. This in turn led to higher wages (which in limited amounts is a good thing) but in this case it caused retailers and restaurants to hike prices and you’ve been enjoying more expensive everything ever since. With the job market cooling, wage gains should slow, and perhaps Starbucks will stop adding another dollar to the menu each time you come in for a latte.
How we are managing client portfolios*
What this means for our investments: There are really only two factors that determine a stock’s price. The first is the company’s future earnings and cash flow. The second is what investors think about the prospects for each company’s future earnings and cash flow. The investor’s job (my job) has two components mirroring these factors. I try to have my own opinion about the prospects for each business we own and secondly to use my judgement to buy or sell when the market is undervaluing or overvaluing each’s likely future performance. How do we get any edge vs. the rest of the market in forecasting a company’s future earnings and cash flow? The hardest way is with real research by pouring through filings, building financial models, visiting company operations, and speaking with management and competitors. This is one of our approaches. We also have a trick. This is to look further into the future. A majority of professional investors are paid on one-year cycles with pay-day coming based on results as of December 31. Accordingly, this group is highly incentivized to care about very near-term results and normally does not focus beyond 12-18 months into the future. Economic cyclicality, Presidential elections, and changes in the direction of interest rates are all important if you need to hit your targets in the next few months. In contrast, we can look though this volatility.
*This is not a recommendation. Please consult your advisor for investment advice tailored to your risk tolerance and investment profile.
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John Zolidis
President & Founder
Quo Vadis Capital, Inc.
John.zolidis@quovadiscapital.com
Mr. Zolidis has 25 years’ experience as an equity analyst. In 2017 he founded Quo Vadis Capital, Inc., a Registered Investment Advisor (RIA) offering investment management for individuals and an idea service for professional investors. He is a frequent presenter at value investing conferences around the world and a guest lecturer at Columbia Business School. Prior to founding Quo Vadis, Mr. Zolidis was a sell-side analyst following the consumer sector. He also managed money in a buy-side role at a long-short equity fund over 2013-2014. He was named in the Wall Street Journal’s Best on the Street list in 2005. He started his career in finance in 1996 following degree studies in Philosophy at Kenyon College and the University of Oxford. Mr. Zolidis and works from New York, NY and Paris, France or wherever he has his laptop.
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