🎙️ Still Hiring Away

Chalk up 2023 as another year in which growth outperforms value.

This year, growth stocks have outperformed value stocks by ~30%, the second-biggest outperformance since the data began in 1979. The only other bigger year for growth vs. value? You guessed it: 2020.

💭 QQQ, the popular tech-heavy ETF, just posted its highest close since January 2022 while XLE, the energy ETF, fell to a new 52-week low vs. the S&P 500.

As you’ll see in our Chart of the Day, it’s been (almost) all about growth stocks over the past 15 years.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets (click one of the links to skip to that story):

• U.S. labor market defies slowdown forecasts

• Could bonds’ role in retirement portfolios be a thing of the past?

• What Gemini could mean for Google-parent Alphabet

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

CHART OF THE DAY

IN THE NEWS

💼 Latest Jobs Data Reaffirms Soft Landing

After inflation being top of mind for a year and a half, Wall Street’s focus is reverting to pre-Covid norms. That is, jobs reports are once again front and center on investors’ minds, especially since many analysts are calling for the Fed to dramatically cut interest rates next year — a tactic historically reserved for recessions.

Put differently, for the Fed to cut rates as expected, the economic outlook will to have to turn down significantly and fast.

• Enter November’s job report. The economy added almost 200,000 jobs in November, better than economists’ estimates of 190,000 and up from October’s 150,000.
  

• As a result, the unemployment rate dropped to 3.7% from 3.9%.

Other jobs report details: Average hourly earnings were up 4% from a year ago and increased 0.4% in November, slightly more than expected.

• The healthcare sector added the most jobs (77,000), followed by the government (49,000), leisure and hospitality (40,000), and manufacturing (28,000).

Why it matters:

The takeaway? Predictions about a reversal in the Fed’s rate-hiking regime have fueled a bond and stock rally over the past six weeks. This report does little to justify such rate cuts, though, showing that the labor market remains intact.

• As a result, some revisited their bets on interest rates, with yields on two-year Treasury bonds jumping from 4.62% to 4.73% on the news.
  

• In other words, interest rate expectations moved higher once again (partially reversing declines over the last month) as bond investors revised their thinking.

For stock investors, the emphasis isn’t as strictly on the direction of interest rates. A not-too-hot and not-too-cold jobs report perfectly aligns with a “soft landing,” where interest rates can come down gradually without a recession & drop in corporate earnings — what fundamentally drives stock returns.

• The economist Robert Frick captured this sentiment well, saying, “What we wanted was a strong but moderating labor market, and that’s what we saw in the November report…this points to the labor market reaching a natural equilibrium around 150,000 jobs [per month] next year.”

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💰 Could Bonds’ Role in Retirement Plans Be A Thing of the Past?

Step aside, bonds — stocks might increasingly be taking over retirement portfolios, and for good reason.

New research from a sample of three dozen countries over 130 years found that a mix of half domestic, half international equities beat blended portfolios (equities and bonds) in both money made and capital preserved. 

• So it’s not just about the recent beating bonds have taken in the past two years (though bonds have done quite nicely in recent weeks). The sample studied was over a century.

Oh boy! The recent research findings add to the debate about whether the 60/40 strategy still works. Fixed income has offered subpar returns amid the Federal Reserve's monetary tightening, with many arguing the traditional 60/40 portfolio needs a makeover.

• Said one of the study’s co-authors: “As long as equity investors are able to stick it out, they end up being better off with very high probability than somebody who’s trying to smooth out those short-term movements by diversifying into bonds.”
  

• The researchers used a computer to run a million simulations for American households, finding that splitting money between domestic and international equities equaled over $1 million on average by retirement, compared with $760,000 for the classic 60% stocks/40% bonds mix.
  

• In other words, the all-equities portfolios suffered steeper downturns but recovered enough to beat the bonds alternatives. 
  

Why it matters:

To be sure, Americans mix bonds into their portfolios mostly because of fixed income’s steady, predictable returns. Many people simply will give up potential profits and higher returns to sleep better at night. 

• Consider that target-date funds — which mix stocks and bonds and dynamically adjust to become more bond-heavy over time — held $1.8 trillion of assets in 2021. 

Talk about a conclusion — Here’s what the researchers said in their report:

• “Given the sheer magnitude of U.S. retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy. Bonds add virtually no value for the lifecycle investors we consider.”
  

• The researchers also pointed out that many money managers and advisors suggest investors own bonds based on the “lazy belief in the capacity of the two asset classes to balance one another.”

The bottom line: They found that equities and bonds move in unison much more than people realize, and diversifying one’s equities across geographies performs better. We say this with the usual qualifier that past returns aren’t necessarily indicators of future performance.

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MORE HEADLINES

🤑 The world’s richest families got $1.5 trillion richer in 2023

⛳ Former World No. 1 golfer Jon Rahm moves to LIV Golf for $300 million

⚾ Carlyle’s David Rubenstein in talks to buy the Baltimore Orioles

🪴 A guide to marijuana legalization in the U.S.

👀 Google faked an AI demo

🍿 Paramount shares jump after report of possible takeover

🤖 Alphabet Rallies as Gemini Eases Fears Over AI Position

For months, analysts wondered: Will ChatGPT render Google obsolete? 

It’s possible, but Google’s parent, Alphabet, eased negative AI sentiment about its ability to stay competitive after releasing the company’s Gemini AI model. 

Shares popped on the news and have risen about 55% in 2023, vs. the 46% gain for the Nasdaq 100 Index and the ~55% rise in Microsoft, a major AI competitor.

• One analyst called the release “a flex of years of AI muscle development,” while another said it expects “negative AI sentiment toward GOOGL to fade quickly, leading to an uptick in its valuation multiple.”
  

• Google’s announcement comes as AI has driven the broader market much higher in 2023, especially in megacap technology and tech stocks.
  

• It’s not just Alphabet and Microsoft; Nvidia and AMD shares have soared this year because they make the semiconductors, aka “chips,” that power so much of our AI world. 

The genius of Gemini: Gemini can spot sleight-of-hand magic tricks and ace an accountancy exam as evidenced by a controversial demo video that got picked up all over social media.

• Above all, Google wanted to tell customers and investors that it still has one of the best AI research teams worldwide and (arguably) more data access than anyone else on Earth.
  

• Said Sundar Pichai, Google’s CEO: “This is the beginning of the Gemini era. It’s the realization of the vision we had when we set up Google DeepMind,” its AI lab.

Why it matters:

In technology, success isn’t about who’s first or second. Just ask Blackberry, whose smartphone market share got swallowed by the iPhone, released later. Or even Google itself, which wasn’t even one of the first several big search engines that launched in the 1990s. 

Which is to say that it’s still early in the AI journey. ChatGPT and Gemini are still evolving, and people are figuring out exactly how to integrate the products into their daily lives. 

• And yes, Google and OpenAI are battling it out. But the race likely includes multiple winners.
  

• “It’s so far from a zero-sum game,” Pichai, the Google CEO, told The New York Times. “We have a sense of excitement at what we’re launching. We also realize we’re in very early days because we can see the follow-up progress we are making.”

Read more

QUICK POLL

Yesterday, we asked: Do you think bullish optimism about stocks is peaking?

— You all were evenly split, with one commenting, “Optimism is obviously elevated, but I don’t think it’s peaked yet.”

— Another added, “Based on the consensus expectations for Fed rate cuts, it seems like Wall St is all in on the soft landing. If that doesn’t happen, we’ll probably see stocks drop.”

See you next time!

That's it for today on We Study Markets!

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