🎙️ Striking Gold

🛍️ Walmart's unexpectedly strong first-quarter results surprised even Walmart itself.

The results also reveal that consumers are still prioritizing value (low prices) and convenience at a time when inflation remains a source of concern.

Executives say its customers are buying more necessities more often, including online: Walmart saw a 22% jump in e-commerce sales, helping drive its market cap above $500 billion.

The retailer’s earnings are a barometer of consumer attitudes and economic strength overall. “We are certainly a beneficiary of the overall economic environment where people are looking for value,” Walmart’s CFO said.

— Matthew & Shawn

Here’s today’s rundown:

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

• Investors are striking gold

• Contextualizing international tensions and markets

This, and more, in just 5 minutes to read.

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In The News

😎 Investors Are Striking Gold All Over

The “everything rally” has been in full swing. Everything from bitcoin and tech stocks to home prices to gold, copper, and utilities stocks have been soaring. Even risk-averse investors are earning 5% on their cash piles. 

Investors have rarely had things go this well all at once. By textbook standards, we might be in an ideal environment: resilient corporate profits, low unemployment, and easing inflation.

Sure, prices at the store remain elevated, but asset prices are also soaring. As one analyst noted, “People are going to complain about everything, but they’re still buying.”

The latest driving forces have been easing inflation, robust earnings, and continued excitement around artificial intelligence. Consider the following returns in 2024:

• S&P 500: 12%

• Nasdaq: 13%

• Bitcoin: 52%

• Gold: 17%

Pure bliss: Strategists interviewed by The Wall Street Journal this week noted investors' “blissful” mood. Though many say technology stocks look overpriced, they also say several market areas remain reasonable, such as Utilities and Energy. 

Contrarian signal? On the flip side, some analysts remain worried about the extent of the government’s borrowing and spending: The U.S. government is expected to pay an additional $1.1 trillion in interest over the coming decade, driving 10-year Treasury yields higher.

• Others point out that the heightened enthusiasm—recently underscored by the return of meme stocks—could mean the market surge might be nearing its end.
  

• “The S&P 500 is now up nearly 50% from the bear market low in October 2022, so naturally, almost everybody is bullish,” which could be concerning, noted one Wall Street strategist. 

Why it matters:

Of course, the recession many economists predicted never materialized. Home prices remain around all-time highs, and most people have been pleased every time they log into their investment accounts. 

Trouble brewing? Others say that while everything appears great, there could be trouble beneath the surface, notably because record housing prices and high mortgage rates make homeownership a distant dream for many Americans. 

• Fed members have cited lower- and middle-income Americans “increasingly coming under pressure.” The members also cited “increased usage of credit card revolving balances and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”

Bottom line: Many investors are in full risk-on mode, hoping that profits will stay strong, unemployment will stay low, and the surging market will keep advancing.

• “I’m betting on America,” one strategist said. “It’s been a very successful strategy.”

Read more

More Headlines

📈 Renaissance Technologies loaded up on GameStock, AMC shares

💸 The salary you need to be considered middle-class in every U.S. state

🔥 Bitcoin breaks six-week losing streak, moves past $67,000

⚔️ How much money the U.S. spends on war

🛑 OpenAI disbands team focused on long-term AI risks

🥙 Contextualizing Current International Tensions

Geopolitical risk. 

The term is all over the news, mostly amid recent challenges such as the Russia-Ukraine war, conflict in the Middle East, and U.S.-China tensions. So, how does this geopolitical pressure period and its impact on the economy and markets compare with previous periods?

An article in the Financial Times written by Citigroup's global chief economist examined just that, especially as some believe we’ve entered an era where geopolitical concerns overshadow fundamentals. 

• While acknowledging the severity of today’s issues, the author makes the case that geopolitical pressures have always existed, citing historical examples such as the World Wars, the Cold War, the 1970s oil shocks, and 9/11 and its aftermath.
  

• “Geopolitical tensions arise inevitably from the posturing and competing interests of nations,” the author notes. “Their ebb and flow has been a fact of life for generations.”

Is recency bias at play? The research conducted by Dario Caldara and Matteo Iacoviello from the Federal Reserve Board, which developed an empirical index of geopolitical risk, lends further weight to this view. 

Their findings, based on rigorous data analysis, reveal that while recent geopolitical pressures are indeed high, they are not unprecedented. The index indicates that current levels are not significantly higher than historical norms, hinting at a tendency for recency bias—overemphasizing recent events. 

• The researchers found that geopolitical pressure peaked during the last century's world wars and stayed high in the 1950s and 1960s. The recent Russia-Ukraine war and Middle East tensions have driven readings to the highest levels since 9/11.
  

• So far, the average of the 2020s is slightly above the center of the longer-term distribution:

Why it matters:

Market commentators and strategists have pointed out that the age of constant news flashes, notifications, and real-time information can make the world worse off than it actually is. 

• The researchers also found that financial markets typically overreact to geopolitical events. Initial impacts are often reversed as uncertainty diminishes.
  

• Their analysis suggests a strategy for investors not to ignore the news and hardship worldwide, but to recognize how much markets can sway in the short run on news with little or nothing to do with fundamentals. 
  

• Despite the severity of current events, their evidence does not support the need for new frameworks to manage geopolitical risks. 

Uncertainty premium: As the author writes: “The markets’ upfront response reflects an uncertainty premium. Markets price in the expected effect of geopolitical challenges. But however bad things look, risk-averse investors are worried about ‘worse case’ and ‘worst case’ scenarios, and an uncertainty premium to compensate gets embedded in asset prices as well. 

“As markets gain additional visibility into the shocks, the uncertainty premium tends to diminish and prices recover.”

All of it brings to mind a Wall Street adage: “Markets climb a wall of worry,” surmounting all kinds of negative factors to rise higher over time. 

Read more

Quick Poll

On Wednesday, we asked: Are you more inclined to invest in actively managed funds or passive index funds?

— Most readers invested in passive index funds, rather than actively managed funds. “If the pros can't beat the index, how can I? Just track the index and get on with life,” one reader said.

— Other responses included, “Low cost for the index you want to invest in which is a long term benefit” and “They are less expensive, which leads to better performance over the long term.”

See you next time!

That's it for today on We Study Markets!

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