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January 31, 2022
I was reading my news app the other day, and I knew the story I was reading wasn’t true. I was shocked how this story was published without any facts! So, I put on my Dick Tracy hat to investigate. Did you know the first known use of the term “fact check” was in 1973 during the Watergate Scandal? It was the journalists at the time who were most concerned with verifying that the story was true. These days, you need to be on the lookout for fake news written by bots posing as humans. These bots are not just writing the headline, they are actually writing the entire article– see more about this on the back cover.
A question that I always have is, “What are we going to learn from the current pandemic?” A few years ago, Laura Spinney wrote a book called “Pale Rider: The Spanish Flu of 1918 and How It Changed The World”. It’s fascinating how little we know about this past event in our country’s history compared to other significant events in the past, such as World War I and II. I’m sure with the invention of the “interweb” (another Ed-ism) and flip phone- I mean internet and smart phone- we won’t soon forget this one. So, how has the pandemic changed us as a society? The first thing that comes to mind is e-commerce adoption has increased from 10% to 13% of total retail sales. While that doesn’t seem significant, it is worth noting that it previously took five years to increase from 7% to 10% of total retail sales. In short, there’s plenty of runway left.
From my perspective, I believe the next big change is coming in subscription video and music streaming services. The cable companies have been ripping the consumer off for years. At some point, there will be a consolidation of streaming companies, but for the time being it’s a free for all. I think I currently have seven streaming subscription services, ranging from ESPN+, Netflix, Prime, HBOmax, Hulu, Paramount, and Apple+. Now, I might have to get a subscription to Spotify. I know who Neil Young is because I was born in the 60’s, but I would guess most people didn’t know he was still around. Who is he, the head of cancel culture? You mean to tell me we can’t have different and varying opinions, or a debate about the issues? I personally don’t care what either Joe Rogan or Neil Young thinks, but I hear The Joe Rogan Experience is pretty entertaining. Hey Neil, if you don’t like what Joe Rogan is saying, just do what I do and turn it off. Who died and made you the leading authority over what people get to listen to? Wasn’t one of your famous songs titled, “Keep on Rockin in the Free World”? What happened to that world? Until next time. Enjoy the Super Bowl!
THREE MARKET DRIVERS
We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.
Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.
Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.
Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.
Here is a breakdown of where each market driver currently sits:
Q4 GDP came in at 6.9%, notably higher than economists’ expectations; Dow Jones found that the average estimate was 5.5% amongst economists. The gain was driven by companies investing in inventory to prepare for the holiday season and increased personal consumption.
The percentage of stocks above their 50-day moving averages has now reached a washed-out level, with the NYSE and Nasdaq-100 having only 28% and 23% of their stocks above their 50-day moving average, respectively.
The AAII Sentiment Survey found nearly 53% of investors currently feel bearish about the next six months in the stock market, the highest bearish reading for the survey since 2013. Individual investor sentiment has historically been a contrarian indicator for the market.
THE STOCK MARKET IS NOT THE ECONOMY
As we leave the fourth quarter behind us and enter earnings season, it is time to review where and how the stock market and economy intersect. While it can seem crazy to see the stock market demonstrate strength since 2020 given the current economic environment of rising inflation and mixed economic data, understanding what the stock market actually follows helps to explain this disconnect.
In the same way home values are determined by the income you could generate by renting, the valuation of the stock market is driven by corporate earnings. Every three months, companies must publicly disclose their corporate earnings for the quarter so that investors can remain informed on the health and success of the company. Conveniently, the majority of companies report this financial information around the same timeframe; this is known as “earnings season.”
During earnings season, there are two main financial measures that investors focus on: revenue growth (also known as sales growth), and earnings (net income) that are measured as earnings-per-share, or EPS. Generally speaking, earnings tend to be the most important measure, as it is a measure of the true profitability of a company. For example, a company can have positive sales growth and negative earnings if the company’s expenses are high enough. By observing earnings, investors are able to view how efficient a company is with its revenue and expenses.
While negative earnings are typically a bad thing, there are exceptions. For example, companies that are in their growth stage tend to reinvest most of their revenue back into the company to promote growth, innovation, increased market presence, etc. By reinvesting this money into the company, these growth companies may have both astronomical sales growth and negative earnings. In this situation, negative earnings would not be as strong of a deterrent as it typically is, as investors would understand that the company is currently more focused on maximizing its growth than its profitability. In short, both sales growth and earnings are invaluable for understanding a company’s financial health in their own, unique ways.
Now that we know which financial measures are important, you may be wondering why earnings season tends to see such violent and volatile swings in stock prices in either direction. In between earnings seasons, Wall Street analysts track companies and create estimates for their upcoming earnings releases, which is where the idea that a company “beats” or “misses” on earnings and revenue comes from. If a company significantly misses these estimates, this is typically when you will see steep, one-day drawdowns. Likewise, companies who blow out Wall Street estimates are typically the situations where you will see a stock’s price skyrocket overnight.
By understanding the impact corporate earnings has on stock prices, you can now see how the stock market has much more to do with a company’s financial information than macroeconomic data like unemployment and jobless claims. As such, it should now be easier to understand why some companies held up relatively well during the crash in 2020; while certain industries had to shut down entirely, companies who were able to manage the lockdowns through an online presence continued to see positive financial data despite the economic shutdown. If there was ever a lesson to be gained from 2020, it is another reminder of the reality mentioned at the top: the stock market is not the economy.
Market indices
Year-to-date returns
Large Cap indices
S&P 500: -7.01%
Dow Jones Industrial Average: -4.44%
Nasdaq-100: -11.43%
Mid and Small Cap indices
S&P 400 (Mid Cap): -9.28%
S&P 600: (Small Cap): -9.26%
Russell 2000: -12.33%
International indices
MSCI EAFE Developed Index: -5.76%
MSCI Emerging Markets: -3.32%
MSCI ACWI ex-US: -4.86%
Economic sector indices
Basic Materials: -8.18%
Communication Services: -8.57%
Consumer Discretionary: -13.02%
Consumer Staples: -1.99%
Energy: 18.45%
Financials: -0.97%
Healthcare: -7.52%
Industrials: -5.80%
Real Estate: -9.67%
Technology: -9.36%
Utilities: -5.07%
NEW AGE OF JOURNALISM
It goes without saying that we have experienced exponential technological innovation in our lifetimes. For the most part, these innovations have been a net positive, like advancements in medical devices. However, like social media, there are some technological innovations that are not a clear-cut positive; innovation is not synonymous with improvement. In fact, one of these new innovations may be affecting your everyday life more than you realize: AI in journalism.
In an attempt to take advantage of modern technology, news media has tried to simplify the process of journalism by utilizing machine learning in the creation of news articles. From Forbes’ “Bertie” to Bloomberg’s “Cyborg,” these “bots” are able to compile financial data for articles, effectively creating a first draft for journalists. However, these bot-assisted articles aren’t limited to financial news, as the LA Times also uses AI to report on earthquake activity, for example.
One of the main arguments in favor of the use of AI in journalism is that journalists can spend more time on their voice and storytelling while the bot compiles the relevant data in a convenient manner. Also, AI can be used to track real-time data, which in turn can alert journalists to potential news stories when there are changes to the data being tracked. While this constant tracking and generating of data can simplify the process for journalists, it is not without its own drawbacks, particularly in the financial space.
In the investing world, you may hear about “algo-trading” simply known as “algos.” Algos refer to computer programs that utilize specific formulas and rules to place trades in the stock market. Due to their nature as a computer algorithm, algos tend to trade at a speed and frequency that human traders are unable to achieve. From specific words that Fed Chair Jerome Powell uses in his press conferences to new economic data, algos can be built around virtually anything related to the stock market. Unfortunately, this can also include news articles.
Bot-generated articles or headlines that discuss the stock market or recap new economic data can be included in algo formulas, meaning that journalists should be aware of what specific words or tone they use in their articles. However, a bot does not realize this phenomenon exists, and may write a headline that can trigger algo-trading in either direction simply based on the words and tone used. On both sides of that scenario, the stock market would be at the mercy of advancements in technology.
On the non-financial side of things, AI writing articles is an even more complicated issue in this era of misinformation and “fake news.” With people either unable or uninterested in fact checking what they read, bots may independently create narratives around data they are tracking, helping to guide people towards an opinion without checking if the information is true. On the flip side, bots could be programmed by journalists to intentionally skew articles and headlines about certain topics towards a specific mindset, potentially influencing others. In short, we want to give people who come across AI-generated articles the same adage that we give investors: stay calm, and do your homework.
Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor.
