🎙️ Revving Up

💭 Where were you 15 years ago this week?

Wall Street joined a worldwide market slump in October 2008. The S&P 500, a key benchmark, had fallen about 25% in October’s first three weeks. Investor panic, measured by the CBOE Volatility Index (the VIX), soared to record levels.

Around the same time, Warren Buffett penned a column in The New York Times: “Buy American. I am,” urging investors to stay invested in quality American companies.

He also correctly predicted that most major companies would set profit records in the next decade. The Oracle nailed it again.

— Matthew & Shawn

Here’s today’s rundown:

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

• Is the economy really revving up?

• Debunking conspiracies about BlackRock & Vanguard

• Car owners are behind payments at record rate

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

CHART OF THE DAY

IN THE NEWS

🔥 The Economy Was Supposed to Slow Down, But It’s Revving Up

Somewhere in this galaxy, market gods are laughing pretty hard.

By now, the economy was supposed to be slowing down. There were calls for recessions and stock market plunges, plus soaring unemployment. This time last year, nearly every economist and pundit was calling for the next 2008.

Instead, the opposite is playing out.

Rising forecasts: Sure, there are some signs of weakness, but recent economic data shows that the economy is accelerating despite higher borrowing costs, wars in Ukraine and the Middle East, and the resumption of student loan payments.

• Analysts that predicted a recession this year continue to raise their forecasts: Goldman Sachs economists, for instance, raised their growth estimate for the quarter to an annual rate of 4%, up from 3.7%.

Strength abound: September was a good month for the economy. The labor market strengthened as employers added 336,000 jobs, up from 227,000 in August and 236,000 in July.

• Despite still-high prices, that hiring has fueled spending as monthly food and retail sales rose 0.7% in September and 0.8% in August after rising just 0.2% in June.
  

• Manufacturing is rebounding, and the big banks kicked off earnings season on a strong note last week. American Airlines expects travel demand to be stronger this year than last year, and inflation has come down to 3.7% in September from a peak of 9.1% in June 2022.

To be sure, the stock market isn’t the economy. Many times, they move in opposite directions in the short run. But economists polled by The Wall Street Journal now believe the economy will avoid a recession in the next 12 months.

Why it matters:

You might be wondering: OK, that’s what’s happening. Great. But why?

• For starters, cooling inflation helps because paychecks go further. Simple enough.
  

• Robust hiring and wage increases give people more disposable income at stores and on trips.

More savings: In the first half of 2023, inflation-adjusted incomes (post-tax) rose at an annualized rate of 7%, pushing up household savings to 5.3% in May from 3.4% last December, adding to the roughly $1.2 trillion in total savings left from pandemic-era stimulus.

• One reason the interest-rate hikes haven’t cooled off the economy: Businesses and families locked in lower interest rates during the pandemic when rates were close to zero. Fed chair Jerome Powell hinted at this last week.
  

• That means many Americans are still locked into relatively low mortgage rates. In some cases, they cashed out some home equity to improve their savings, which they’ve been spending this year.

The bottom line: The “economic revving up” could be short-lived, or the economy could stay strong, which might send inflation up (or keep it around 4%, above the Fed’s 2% target). That would drive the Fed to raise rates again to try to slow down the economy. Again.

Read more

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🤦 No, A Cartel of Asset Managers Don’t Control America

You’ve probably seen TikToks, Reels, and other viral videos warning about the ‘cartel’ of companies that ‘secretly’ own America’s biggest companies (lucky you, if not!).

Big investment managers like Vanguard, BlackRock, and State Street sit at the center of the fearmongering — you probably recognize their names from your company’s 401(k) offerings.

But it’s not just conspiracist influencers raising alarm bells; the conversation has reached Congress, too. While the popular narrative is that these firms ‘own’ or ‘control’ companies like Apple, Lockheed Martin, and Disney, the reality isn’t so black and white.

Big Three: While you can look up many of America’s biggest companies and find Vanguard, BlackRock, and State Street, which we’ll call the “Big Three,” listed as the biggest shareholders, that’s because they hold these shares on your behalf.

• As one Morningstar analyst put it, “They don’t own them for their own personal corporate reasons. They didn’t just go out there with their own money and start buying up stakes in these companies.”

BlackRock holds $9 trillion of investors’ assets, largely in basic index funds tracking benchmarks like the S&P 500, but the company itself is only worth $92 billion.

• As a company, BlackRock’s value comes from the fees it charges investors to manage their assets, not from the actual assets themselves.

Why it matters:

Is there still reason for concern? Perhaps. These companies do have voting rights on investors’ behalf in shareholder meetings to elect new board members, approve mergers & acquisitions, and so on, though they’re largely providing a helpful service.

• Rather than receiving a proxy ballot in the mail whenever a company in your S&P 500 index fund has a shareholder vote, the Big Three vote for you on these often mundane corporate issues, typically in lockstep with management’s suggestions (not pushing their agenda.)
  
  

• Still, this is where more plausible concerns about the Big Three exist, as they certainly wield substantial power in shareholder votes — theoretically.

In practice, Vanguard voted in favor of management-led proposals to elect directors 93% of the time last year. And despite worries about BlackRock’s ‘woke’ ESG initiatives, the company has only supported 7% of proposed environmental and social initiatives, citing a lack of economic merit or concern that the issues were already otherwise addressed by companies.

• Another reality to consider, as one investor frames it, is that “the Big Three might own 20% of shares (at a company), but 80% is shareholders out there that aren’t the Big Three.”
  
  

• They have also all recently launched pilot programs allowing investors to direct how they vote on certain matters (one example from Vanguard.)

Read more

MORE HEADLINES

📈 Chevron to buy Hess Corp. in $53 billion all-stock deal

🎓 How university early-decision applications mostly benefit the wealthy

⚽ Apple wants to lure sports fans to its streaming service

💵 Meta, Alphabet, Amazon and Microsoft highlight big earnings week

🤑 President Biden requests $105 billion from Congress for aid to Israel, Ukraine, the U.S.’s southern border, and more

🚗 Car Owners Fall Behind on Payments at Record Rate

Americans are falling behind on their auto loans at the highest rate on record, according to a Bloomberg report.

As of last month, 6.11% of subprime auto borrowers were at least 60 days past due on their loans, per Fitch — the highest since data was first collected in 1994. The Federal Reserve will likely keep rates steady — or even increase them — meaning the percentage of drivers behind might worsen.

Getting squeezed: Subprime loans are for people with credit scores between 501 and 600. Their rates aren’t ideal: 11.75% on new cars and 18.5% on used cars.

• Americans are spending $500-$700 per month on car payments, not including insurance. Over 90% of U.S. households own at least one car.
  

• “The subprime borrower is getting squeezed,” a Fitch analyst said. “They can often be a first line of where we start to see the negative effects of macroeconomic headwinds.”

As an aside: The Wall Street Journal reported that April and May are the best months to purchase a car because people feel richer with their tax refunds.

Why it matters:

Just about all of us are grappling with still-elevated inflation. But the issue with car loans has been a double whammy: high car prices (both new and used) and a higher cost of borrowing, just as many Americans are starting to pay their student loans again.

• A car is necessary for millions of Americans living in areas without steady public transit (i.e., most of the U.S.)
  

• But vehicle prices have hardly fallen from their pandemic peaks, pricing out many low-income workers who need a car to get to work.

Payment delinquencies are rising. Repossessions are also expected to jump. Cox Automotive predicts that about 1.5 million cars will be seized this year, up from 1.2 million last year.

But context is key: Startling numbers, surely, but not every news report will provide context: Those numbers are still below pre-pandemic levels. That’s because the rates fell to lows in 2020 and 2021, before inflation kicked into gear, back when consumers had some extra cash thanks to stimulus checks. In 2019, the number of repossessions was worse.

Read more

QUICK POLL

On Friday, we asked: If you didn’t have to work anymore, what would you do?

—The winner was “travel,” which got about 42% of the votes

—About 29% of readers would start a business; 10% would simply hang out with family and friends; others would volunteer or try a new career for fun.

—“It’s not about relaxing but rather being more with the ones I love and care for,” one reader wrote. “Help other people starting from scratch,” wrote another.

See you next time!

That's it for today on We Study Markets!

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