🎙️ Binge At Your Own Risk

💡 Americans are either getting sicker, or they’re just more adept at maximizing their sick days: 30% of white-collar workers have taken paid sick time off this year, up from 21% in 2019.

Employees aged 25-35 are leading the way, mostly behind the simple reasoning that if you’re entitled to sick days, why not use them?

Others use sick days for reasons like mental and emotional health. Or, as one worker told The Wall Street Journal: “It was a gorgeous day. I just wasn’t in the mood to work.”

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• The 60-40 investing strategy’s malaise

• The stars align for Netflix

• Universal Music clashes with Amazon-backed AI startup

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

📉 Why the 60-40 Investing Strategy Just Had A Rough Year

The trusted 60-40 investing strategy — a staple of traditional investment advice and diversification — just had its worst year in generations. It shed 17% last year, the worst performance since at least 1937, according to The Wall Street Journal.

• Financial advisors tout the 60-40 strategy as one of the simplest but still effective ways for people to invest. Own stocks to capture the market when things are going well; own bonds when stocks have a bad year, offsetting the losses.
  

• But since late 2021, bonds have fallen along with stocks. And with the possibility of prolonged high rates and lingering inflation, advisors say they’re receiving dozens of client calls to dump bonds (and some stocks) to flee to cash.

How it should work: Stocks tend to fall if the economy slows, driving up unemployment. Consumer spending and corporate profits suffer, pressuring stocks further.

• Bond prices would rise as investors seek the safety of fixed income from bonds and the promise of full repayment.
  

• Then, during a recession, the Federal Reserve cuts interest rates to drive lending and business activity. As interest rates on newly issued bonds fall, investors pay up for existing bonds with higher yields, boosting returns for bond investors.

But this year, the Fed has continued raising rates, hurting bond prices and lifting yields.

Flocking to cash: People want more than a 5% annual return, but that’s what many 60-40 mixes deliver. Yet, investors can easily fetch that in something with even less risk — cash. Specifically, they’re flocking to money-market funds, sending assets in those funds to a record $5.7 trillion.

Why it matters:

For context, in 2008, bond prices surged because investors wanted to put their money in the safety of U.S. Treasurys. The Fed slashed rates, and the 60-40 mix made sense.

• The mix also beat holding just stocks in 1917, when the U.S. entered World War I, in the early 1930s, during the Great Depression, and in 1974 amid soaring energy prices and double-digit inflation.
  

• Vanguard’s head of portfolio construction says the 60-40 delivers ~6% per year and functions as a cushion during recessions.
  

• “The problem isn’t higher rates, it is when they are rising rapidly like in 2022,” he said. The Fed has hiked rates 11 times since March 2022 — the fastest pace in over 40 years.

Be careful: The recent malaise around the 60-40 mix has prompted many investors to bail on the strategy. Plus, new regulation restricts big banks’ government bond purchases, and Japan — America’s largest foreign creditor — cut its U.S. bond holdings this year to the lowest level since 2019.

• “If you’re blindly relying on the old regime of 60-40, just be a little careful,” Bank of America’s chief investment strategist said.

Read more

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🚀 Netflix’s Stock Surges After Earnings

Oh, how sweet it is to jump on a call with investors and brag about how well your business is doing — even better when investors agree and send your stock to the moon on the new information.

That’s been the story of Netflix’s past 24 hours, which is especially welcome after past earnings debuts haven’t been as well received. Netflix’s stock dropped over 20% to kick off 2022; the last time it reported quarterly earnings this year, it sank 8%.

Not this time, though. Netflix stock popped over 16% after reporting 8.76 million new subscribers globally, trouncing Wall Street estimates of 5.49 million. For context, that’s the most it had ever added in a single quarter since the beginning of Covid lockdowns, when we were all stuck at home with nothing to do but stream shows.

More good news: Netflix’s cheaper, ad-supported tier at $6.99/month grew almost 70%. If there was any doubt about who rules the streaming world, it’s clear Netflix is still king.

• In its basic and premium subscriptions, prices are rising 20% and 15%, respectively, showcasing the company’s pricing power. Netflix’s premium package will now be tied with YouTube’s premium family plan for the most expensive video streaming option.

Why it matters:

The stars aligned for Netflix this time, but it still faces plenty of challenges. For example, it doesn’t want to suddenly drive away Netflix watchers who are, well, mooching access off friends & family.

Rather, the company is trying to thread the needle with these password borrowers (no judgment toward anyone who does!) and convert as many as possible into paying customers.

Binge at your own risk: Netflix is taking a dynamic approach to this, looking to prompt “borrowers” to create their own accounts while binge-watching a series — when they’re the most likely to want to continue watching and impulsively sign up.

• If you’re a password borrower and haven’t been prompted to create your own account, you might be part of a “number of borrower cohorts who haven’t received that experience,” according to Netflix’s co-CEO Greg Peters.
  

• He added that the plan is to “approach the right (password) borrower at the right moment.”
  

• But as fewer new shows and movies come to the platform after Hollywood labor strikes have rippled across the entertainment landscape, baiting these holdouts with fresh, addicting content is easier said than done.

Read more

MORE HEADLINES

📈 Americans’ net worth rose by a record 37% from 2019-2022

🚗 Tesla misses on earnings and revenue for the first time since July 2019

📺 Disney details ESPN’s recent revenue declines

💬 OpenAI is considering selling shares at $86 billion valuation

☁︎ Microsoft in talks to sign on Amazon as a customer in $1 billion cloud deal

🎤 Universal Music is Suing Amazon-Backed AI Startup

Expect to see more headlines like this in the coming years ^

AI is clashing with many different businesses for possibly infringing on protected intellectual property.

On Wednesday, the music industry outlined its AI grievances, with Universal Music Group and two other major publishers filing a copyright infringement lawsuit against Anthropic — an AI startup set up by OpenAI founders in 2021 and backed by Amazon.

• Its chatbot, Claude, is allegedly stealing lyrics. “Anthropic’s AI models generate output containing Publishers’ lyrics even when the models aren’t specifically asked to do,” allege the plaintiffs.

For example: Prompts related to writing a song about moving from Philadelphia to Bel Air might prompt the bot to produce a nearly identical song as Will Smith’s “Fresh Prince of Bel-Air.”

The lawsuit claims that some 500 pieces of work have been infringed upon, with the publishing companies seeking $150,000 in damage compensation per work infringed.

• That would amount to $75 million in costs for the $4 billion AI startup.

Why it matters:

AI isn’t immune to copyright laws: In the music publishers’ complaint, they wrote that “although the AI technology in this case may be complex and cutting edge, the legal issues prevented here are straightforward and long-standing.”

Adding, “A defendant cannot reproduce, distribute, and display someone else’s copyrighted works…This foundational rule of copyright law dates all the way back to the Statue of Anne in 1710…That principle doesn’t fall away simply because a company adorns its infringement with the words ‘AI.’”

• Strong words. This comes after Universal Music Group told music streaming platforms in April to take down a popular AI-generated song, “Heart on My Sleeve,” with fake versions of Drake and The Weeknd.

Not all bad: Universal isn’t totally against AI. The company has several AI-related partnerships, and Universal’s CEO has said, “our challenge…as an industry is to establish effective tools, incentives, and rewards…that enable us to limit AI’s potential downside while promoting its promising upside.'“

• “If we strike the right balance, I believe AI will amplify human imagination and enrich musical creativity in extraordinary new ways.”

Read more

QUICK POLL

Yesterday, we asked: What is your top financial goal right now?

—27% of you said your top goal is to invest more in the market

—Another ~25% said it’s to save for retirement, while 10% of you said your top goal is to save for a house

—As one reader says, “Generate retirement income from my portfolio.”

See you next time!

That's it for today on We Study Markets!

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