Ladies and gentlemen, the weekend! In this space each week, Greg and I share some of our favorite articles, notes, and graphics from the past week along with our commentary. Please feel free to provide feedback and forward along to others if you enjoy. We appreciate you taking the time to read. 

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Is This a Bear Market Rally?

“Markets picked up steam recently, anticipating that the Federal Reserve (Fed) could follow a 0.75% rate hike in November with a smaller 0.50% rate increase in December. Markets have been rallying since mid-October, up 7% since the mid-month low. But is this just another bear market rally?

Although the S&P 500 only fell into bear market territory in June, it has been steadily declining since its January peak. Yet, since then, it has experienced seven bear-market rallies. What has precipitated these rallies? We’ve seen optimism on economic growth, hopes of softer inflation and an easier Fed, and “less bad than feared” earnings. Sound familiar? We have been here before…

What has continued to reverse these rallies throughout the year has been higher expectations of the ceiling on the federal funds rate. For example, the market low on June 16 followed a 0.91% jump over the prior week in the expected terminal rate [see graph of the week below]. Therefore, irrespective of what happens in the November and December meetings, we may not see a sustained bull market until the federal funds rate plateaus.

Yet, bear market rallies can still provide solid returns— the seven bear-market rallies this year (including the current one) returned over 8% on average. While this may not be the moment to add to equities, staying invested can help portfolios recover in the long run.”

Stock markets have rallied more than 7% over the last two weeks as rumors have circulated of a Federal Reserve pivot to a more lenient monetary policy after the next interest rate hike. There have been numerous, short-lived bear market rallies this year. Let’s hope this is not more of the same.

3rd Quarter GDP

“Real GDP growth in the third quarter supports our case the economy is not yet in recession, but also signals trouble ahead. Real GDP grew at a moderate 2.6% annual rate in Q3, beating consensus expectations.

The growth in the third quarter was led by net exports, particularly in the goods sector, where exports surged and imports fell. However, don’t expect that to continue. The dollar has strengthened substantially versus other major currencies and so will limit future purchases by foreigners while making foreign goods relatively inexpensive for Americans…

We like to follow personal consumption, business investment, and home building, combined, which we call “core” GDP. This excludes the effect on real GDP of government purchases, inventories, and international trade, all of which are very volatile from quarter to quarter and which are hard for the US to rely on for long-term growth.

The problem is that although overall real GDP increased at a 2.6% annual rate in Q3, core GDP rose at a meager 0.1% pace. That’s a growth rate in core GDP that we usually see just before, during, or just after recessions. No bueno.

The construction industry already appears to be in a recession of its own. Home building declined at a 26.4% annual rate in Q3, the sixth consecutive quarterly drop and the largest decline since COVID first hit the US. Commercial construction fell at a 15.4% annual rate, also the sixth consecutive negative quarter and the weakest since COVID first hit. Meanwhile, inflation remains a problem. GDP prices rose at a 4.1% annual rate in Q3 and are up 7.0% from a year ago…

These figures signal that monetary policy still needs to tighten to bring inflation back down and a monetary policy tight enough to do that is likely to eventually cause a recession.”

This week’s release of the advanced 3^rd quarter economic growth figures was positive on the surface. At the very least, the economy was back into positive territory with a moderate +2.6% annualized growth rate. However, there were some underlying issues under the surface. Removing government, inventories, and trade activities, which can oscillate quarter to quarter, the core GDP growth was nearly flat. 

Since becoming Meta, Facebook’s parent company has lost $650 billion

“It has been exactly one year to the day since Facebook’s parent company rebranded as Meta, and in that time the company has entered financial free-fall, analysts say. Comparing the market values of Meta when it was first announced on Oct 28, 2021 to today, the company has shrunk by an astonishing $650 billion…

Meta’s market cap now stands at $263 billion. They are valued lowered than Home Depot and have been forced out of the ranks of the top 20 companies…

Similar to the massive one-day loss seen on Feb. 2, Meta’s stock crash [-24%] on Thursday was triggered by a weak revenue report, predicting a 50% decline in profits, with plans to maintain their high spending on building out the metaverse — to the sum of around $87 billion, that will increase to around $100 billion next year.

There seems to be conflict between Meta and its investors, who see the metaverse as a money pit and are calling for the company to cut costs as the economy slows, while Zuckerberg bets it all on his virtual reality tech.”

Most of the big technology companies reported quarterly earnings this week including Apple, Microsoft, Amazon, Google (Alphabet), and Facebook (Meta). While most struggled with profit margin issues, Facebook/Meta fell flat on its face with guidance towards burning more cash to develop its metaverse. It’s the second time this year that its stock price has fell more than 20% in a day. It has now gone from the 5^th largest market cap in the U.S. to 21^st. Investors beware of tech companies with light connections to their user base and narrow “moats”.

Thanks for reading. Have a great weekend!