Barron’s Weekend Summary: American consumers are still on a roll, accounting for about 70% of the US economy
Cover:
After two years of sustained spending, rising interest rates, and inflation, American consumers are still on a roll, accounting for about 70% of the US economy. The Covid-era spending spree has kept the GDP on a path of surprisingly strong growth, with real GDP growing nearly 5% in the third quarter. However, the spending boom is bound to lose some vigor as savings erode and higher rates bite. Real personal-consumption expenditures are on track to rise 2.2% this year, below last year's 2.5% growth rate and 8.4% growth in 2021. However, relatively healthy household finances, a resilient labor market, and substantial housing wealth suggest that consumers still have plenty of firepower and that the US economy will avoid a recession next year. A healthy labor market has been the driving force behind consumer spending, with a 3.1% annual jump in retail sales in the past three months.
Interview:
-This week’s Interview features Thomas Buberl, CEO of AXA. Buberl has led the Paris-based insurer through a transformation since becoming CEO in 2016. The company has grown from life insurance to a diversified global business, managing around $920B in financial assets. Despite facing global turmoil, such as Russia's invasion of Ukraine, AXA remained profitable. Buberl has taken aggressive positions on climate issues, including divesting from coal. His view of the world is influenced by the company's annual Future Risks report, which describes a world in "polycrisis" where risks are interconnected. Climate change is ranked as the world's top risk, followed by cybersecurity, geopolitical instability, artificial intelligence and big data, and energy issues. Buberl believes that the sequence of risks' realization is changing, with many of them happening together or straight after one another.
Tech Trader:
-Cisco Systems, one of the tech giants, is still dealing with Covid. it has reportedly slowed its growth amid the Covid pandemic. Despite a 8% increase in revenue in the October quarter, the company's product orders fell by 20%, with a 32% decline in orders from telecom and cloud customers and a 26% slide from enterprise customers. This has led to a 10% drop in the stock, which is currently flat on the year. Cisco's January quarter guidance calls for revenue of $12.7B, a 6.6% decrease from the previous year, and a 5% decline in its July 2024 fiscal year, all attributed to the pandemic.
The Trader:
-The November stock market rally has been convincing, with the S&P 500 index potentially hitting a record high by the end of the year. The S&P 500 gained 2.2% this past week, while the Dow Jones Industrial Average advanced 1.9% and the Nasdaq Composite rose 2.4%. The lift came on Tuesday when October's consumer price index came in lower than expected, solidifying the Federal Reserve's thesis that interest rates will stop raising. The CPI reading was good, with headline numbers and core CPI rising 0.2% and 0.3% respectively, indicating the Fed is winning the battle against inflation. The S&P 500 has advanced 10% over the past three weeks, its largest three-week gain since 2020.
-Copper prices are starting to recover, with future contracts increasing by 5.4% to $3.71 per pound from a low of $3.52 on October 23. This is driven by lower inflation, which suggests the Federal Reserve may cut interest rates, potentially supporting economic demand and the price of copper. Lower rates would also weaken the dollar, boosting copper, which is priced in greenbacks. Freeport-McMoRan stock, which recommended copper could hit close to $5 soon, has also seen a drop in rates, boosting optimism and potentially encouraging traders to invest more in commodities like copper. The current value of all commodities held by nonbanks is about 0.5% of the value of all bonds, cash, and equities held, indicating that traders can tolerate more risk in commodities.
Features:
-Elon Musk's seeming endorsement of anti-Semitic rhetoric has sparked backlash from advertisers and Tesla shareholders. Musk's posts on X, the former Twitter platform, have drew condemnation from the Anti-Defamation League and the White House. Several prominent advertisers, including Apple, Disney, Lionsgate, and the European Commission, have suspended advertising on the platform. Tesla shareholders have also expressed outrage. Kristin Hull, founder of Nia Impact Capital, called on Tesla's board to punish Musk, stating that it is their responsibility to look after all stakeholders, including shareholders, employees, and the community. Nia Impact Capital called on Tesla's board to censure Musk, which could include demotion, reassignment, suspension, or removal.
-OpenAI has announced that CEO Sam Altman has resigned due to his inconsistent communication with the board, which hindered the company's ability to exercise its responsibilities. The board no longer has confidence in Altman's ability to continue leading OpenAI. Chief technology officer Mira Murati was appointed interim CEO. Altman expressed his love for his time at OpenAI and the transformative experience working with talented people. Microsoft, the largest investor in OpenAI, did not directly address the reasons for Altman's departure but stated its commitment to Mira and their team.
Europe:
-Volvo Cars' stock fell by 11.144% in overseas trading on Friday, primarily due to technical reasons rather than fundamental factors like weak car sales or rising costs. The drop was caused by entities connected with parent company Geely selling shares, which held less than 80% of the outstanding shares. The sale aimed to increase the number of shares available for trading, making it easier for larger investors to take positions in the stock and increasing the potential pool of buyers.
Emerging Markets:
-There was no update this week, but in view of the Argentinean elections on Sunday Nov. 19, it’s worth rereading an article from Barron’s published last October 24:
Argentina's economy is facing a grim outlook, with long-suffering bonds sliding another 10% after the first-round presidential election. Economy minister Sergio Massa has risen from third place in the August primary to first with 37% of the vote. Argentina's next bond restructuring, expected in 2024 or 2025, could be more investor-friendly than the last one, which was hammered out in 2020. The principal holiday starts to expire next year, likely requiring Argentina to restructure again. Argentina's economy is caught in a vicious cycle, with government overspending driving inflation, making citizens more dependent on social support, and driving more spending. Massa is expected to slay Argentina's economic dragons, but the country is caught in a vicious cycle. Libertarian firebrand Javier Milei may be willing to rip off the Band-Aid if he comes back to win the second round, but he would have to grapple with the Peronists' dominance of Congress, the key Buenos Aires regional government, and still-powerful trade unions.
Commodities:
-Oil prices fell for a fourth consecutive week, despite an uptick on Friday. The drop is attributed to a slump in demand and a boost in supply, but some of it is technical and potentially temporary. Prices could rebound in the coming weeks, but recent economic data isn't particularly optimistic for oil bulls. Unused crude oil is filling up storage tanks in Cushing, Oklahoma, and Chinese refining margins have fallen, indicating soft demand in China. The International Energy Agency and US Energy Information Administration have been lowering their 2024 global oil demand forecasts, with the EIA now expecting a 100,000-barrel-per-day surplus in the oil market next year.
Streetwise:
-The cheapest stock in the S&P 500 is no bargain says Jack Hough. Credit-card issuer Synchrony Financial or Texas utility NRG Energy, which are in the bottom five at just over 5X forward earnings estimates apiece. It is not United Airlines Holdings or General Motors, which Warren Buffett has had enough of after 11 years. The company's name vaguely evokes a date-night medicament for men: the cheapest stock in the S&P 500 is Viatris (VTRS), which trades at just 3.3X earnings and has a dividend yield of 5.1%. Jefferies upgraded the stock early this year, it said it liked that management had recently provided a “clear road map” to growth. It had bought two companies with treatments for dry eyes as part of a strategy to become a “global ophthalmology leader.” More broadly, it plans to offset its base business erosion with its “organic pipeline,” which means making things, and its “inorganic opportunities,” which means buying things.