🎙️ In da Club

Bitcoin keeps humming along — its rally is too hard to ignore.

The asset is up about 10% in the past week, 150% in 2023, and ~1,120% over the past five years. ETF hopes and rate-cut bets are driving the latest surge.

Plus, U.S. crackdowns on Sam Bankman-Fried and Changpeng Zhao have reassured investors.

Below, we’ll cover what many people compare Bitcoin to: Gold, which is on a hot streak of its own.

💭 Oh yeah, one more thing. If you love our newsletters (or podcasts, too!), you’ll also love our content on social media. Check out our brand new accounts on Instagram and TikTok.

— Matthew & Shawn

Here’s today’s rundown:

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

• Gold’s rise to all-time highs

• Uber to join the mighty S&P 500

• Why goods deflation is back

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

CHART OF THE DAY

🧈 What’s Behind Gold’s Rise to All-Time Highs

Oh, we see you, gold.

Gold prices hit a new intraday high on Monday as part of a broader rally, driving assets higher. 

Investors are betting that the Federal Reserve is done lifting interest rates this cycle, sending the price of gold to roughly $2,135.39 an ounce, surpassing the previous all-time high set in August 2020. In sum, gold is up roughly:

• 10% in 2023 vs. 19% for the S&P 500
  

• 63% over the past few years vs. 73% for the S&P 500

Soaring high: Some market onlookers think the Fed could start rate cuts as soon as early 2024, perhaps in March, which is another positive signal because lower interest rates have tended to increase demand for gold. (Unlike bonds, gold doesn’t pay interest.)

• On the flip side, some investors are turning to gold before a possible recession — yes, we’ve heard that line for a while now — and other factors, such as countries moving away from the dollar.
  

• “Markets are pricing in several key interest-rate cuts for next year—not only in the U.S.A. but also in Europe,” said a precious metals trader. “If signs of low-interest rates become more evident, gold should continue to soar next year.”

The answer? Fed chair Jerome Powell’s comments Friday were interpreted as hints toward rate cuts, which drove a plunge in the U.S. dollar and Treasury yields. 

The precious metal also has benefited from purchases by governments and central banks worldwide this year amid geopolitical uncertainty, including wars in Ukraine and the Middle East. There’s also political uncertainty heading into 2024, when 41% of the global population will hit the polls.

• Gold “is the answer for many things at the moment – whether it’s inflation carrying on, rate cuts or the uncertainty with very costly wars going on,” said one portfolio manager. 

Why it matters:

Let’s zoom out for a bit because it’s not every day that we hear of Americans hoarding gold or bragging about their gold stash at happy hour.

• Gold is up roughly 600% since 2000. Yet when adjusted for inflation, it’s below the $850 it reached in January 1980, more than 40 years ago. 

• Generally, gold falls out of flavor when interest rates rise and investors can find more appealing alternatives, whether it’s bonds or, more recently, cash that earns a 5% yield. 

Like any rally, gold’s 2023 rise could be overdone. One analyst warned that the recent rally could be due for a pullback.

But it posted a great October, rising over 10% as Treasury yields and the dollar fell amid expectations that rate cuts are near. Perhaps it has more strength in store. 

Read more

IN THE NEWS

🚗 Uber Stock Pops on S&P 500 Addition

Indexes like the S&P 500 may seem like arbitrary and subjective groupings of companies, but they determine how trillions of dollars are invested.

And these indexes aren’t stagnant, either. Every quarter, companies are removed or added. For those on the outside looking in at the S&P 500, inclusion would offer clout, prestige, and, more importantly, a lot of support for their stock price.

• Uber is the latest inductee (or soon to be) into the index, following an announcement from S&P Dow Jones Indices on Friday, causing the stock to jump 5% on Monday.

Join the club: Over two weeks before Uber is officially in, investors are buying the stock in advance, expecting an S&P 500 spot to translate into more Uber stock buyers going forward.

• See, the S&P 500 is market-cap weighted, meaning bigger companies have greater influence on fluctuations in the index’s calculated value.
  

• But even if your company accounts for a small sliver of the S&P 500, just being “in the club” means that a fraction of all new inflows into S&P 500-tracking “index funds” will have to buy (or sell, but mostly buy) your company’s stock.
  

• And funds will have to purchase Uber stock by the time it officially joins to ensure their portfolios track the S&P 500 as closely as possible, so the Vanguards and BlackRocks of the world will be trying to acquire enough shares over the same period.

To really, really simplify things: Whenever, say, Barbara from accounting contributes $1,000 to her 401k, that helps bid up the price of her S&P 500 ETF, causing the fund company — often Vanguard or BlackRock — to create more shares in their index fund. (If the ETF share price exceeds the fund’s net asset value).

• That ultimately means buying up more shares of every company in the S&P 500, proportional to their weighting in the index.

Why it matters:

As of 2021, $5.4 trillion sat in investment funds tracking the S&P 500 index.

Lots of perks: Not only is acceptance into the S&P 500 validation for Uber due to the index’s strict standards, but, as mentioned, joining the S&P 500 means more buyers for Uber stock, primarily thanks to passive index fund investors.

• And investment analysts at Oppenheimer speculated that after joining the S&P 500, executives at Uber will further prioritize “share buybacks” in 2024, adding more support for the stock.
  

• Share buybacks are when companies use corporate funds to purchase their stock in the open market, removing shares from circulation and leaving existing shareholders with a bigger slice of the ownership pie.

To be included in the S&P 500, companies must have positive earnings over the past four quarters, among other requirements. Uber has over $1 billion in profits in the last four quarters,

Read more

TOGETHER WITH THE AVERAGE JOE

The “IKEA Instructions for Investing”

Assembling IKEA tables got you feelin’ like the Steph Curry of furniture?

The Average Joe will turn you into the Marie Kondo of investing. Organized, calm and ready to conquer the markets.

Their newsletters are the “IKEA instructions for investing” — short, simple and concise — filled with market trends and insights.

But you don’t read IKEA manuals on your spare time and you wouldn’t read financial publications for fun. Until now…

MORE HEADLINES

📈 Goldman says 2024 will be ‘the year of the bond’

💻 How your physical surroundings shape your work life

🎧 Spotify layoffs continue; company lays off 17% of workforce

✈️ Alaska Ait to buy Hawaiian Airlines for $1.9 billion

🎥 Paramount, Apple eye streaming bundle partnership

 🚢 Commercial ships and U.S. destroyer attacked in the Red Sea

🚗 How Goods Deflation Could Speed Inflation Return to 2%

Ahem. Good deflation is back. Say what?

That could mean reaching the magical, mystical, transcendent “2%” inflation target that the Federal Reserve so dearly hopes might be closer than we think. 

• Hard to believe, yes. But Americans haven’t seen deflation in three years, and many people experiencing it couldn’t be happier after years of rising prices. 

Deflation, or falling prices, is mostly confined to appliances, furniture, used cars, and other goods, so it’s not everything. It’s certainly not housing or groceries, either, nor is this “economywide deflation,” when the prices of most goods and services fall continuously. 

• We’re not there yet, but goods likely have further to fall, which could speed up inflation’s return to the 2% target, perhaps as early as the middle of 2024.

• Durable goods (think cars, washing machines, etc.) prices have fallen on a year-over-year basis for five consecutive months. By October, they were down 2.6% from their peak in September 2022. 

• That, in turn, has brought down core inflation, which doesn’t include food and energy, to 3.5% in October. That was 5.5% in September 2022.

Here we go again with the supply chains: Product shortages, congested supply chains, and consumer demand contributed to soaring prices in 2021 and 2022. 

But falling demand and cleaned-up supply chains have eased inflation. Take automobiles: The price of new and used motor vehicles and parts have fallen for five straight months. 

• Some economists now say inflation could dip below 2% by late 2024, much sooner than the Fed has anticipated (2025 or 2026). 

• At their core, prices = cost of inputs (labor, materials, capital) plus profit
  

• “If you think of the supply problems as pushing up the price, the healing of supply problems should be pushing down the price back to whatever the equilibrium is,” noted one economist at UBS.

Why it matters:

Nearly everyone could use some relief in the inflation department. 

Free fallin’? Vehicles are expected to fall in 2024 after years of rising prices. Gas and food are more volatile, but economists say they don’t expect anything like the rises we saw in 2022 anytime soon. 

Meanwhile, businesses are adjusting to the days where rising prices might be behind us. 

• Walmart’s CEO said last month that the number of items with price cuts has risen 50% over 2022 because “we’ve been in a pretty steep inflationary environment the last couple of years. So it’s good to see some of these prices come back in line.”
  

• Knock on wood. Quite frankly, those are words many Americans almost wouldn’t believe, even just a few short months ago. 

Read more

QUICK POLL

On Friday, we asked: How closely do you pay attention to market forecasts?

— One reader commented, “While I am attentive to forecasts, it rarely influences my investment decisions.”

— Another added, “If you believe in intrinsic value, then the only reason to follow forecasts is to understand what those on the other side of the trade are thinking.”

— Here was a great point from team rarely or never, “It’s hard work to figure out the past, even for professional historians. It’s almost impossible to understand the situation today. Why would anyone think they might know what the future holds? ”

— On the flip side is this, “Investor sentiment is a self-fulfilling prophecy, so it’s best to stay updated.”

See you next time!

That's it for today on We Study Markets!

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