🎙️ Thanks, Big Tech

👨‍🎓 Despite soaring student loans, artificial intelligence, and falling confidence in the value of a college education, it still pays to get a degree.

As shown below, the wage gap between college and high school grads keeps widening. Even those who attend college but don’t graduate earn more over a lifetime than people who don’t go to college at all.

“We’re in an economy that puts a premium on high skill, knowledge, idea generation,” noted one New York Fed official.

— Matthew & Shawn

Here’s today’s rundown:

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

• Booming markets in a post-ZIRP era

• The case against target-date funds

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

Chart of the Day

In The News

💬 Reflecting On Earnings Season

Bitcoin is booming, tech stocks are flying, and monetary policy is softening as the Fed contemplates cuts. It feels like 2020 and 2021 again. Yet, a common response to market euphoria back then pointed to the four-letter acronym “ZIRP,” which stands for Zero Interest Rate Phenomenon.

The sentiment being that finance gets weird when savers and investors can’t earn much more than 0% on their cash, pushing them to do desperate things to earn decent returns.

• But as Robinhood once again becomes one of the most downloaded apps on the app store, penny stocks see surges in trading volumes, and other such symptoms of “meme-stock” mania manifest, we can no longer point to ZIRP with interest rates at 5%.

• Is it simply that interest rates didn’t rise high enough, or that a recession hasn’t arrived, to re-enforce the laws of financial gravity on markets? Perhaps, but that’s only if you think the recent market highs are entirely unjustified.

To the contrary, this past earnings season more than delivered — over three-quarters of S&P 500 firms beat quarterly earnings projections.

Why it matters:

As Bloomberg reports, “Results for the final quarter of 2023 signaled continued corporate strength despite the angst…All told, Corporate America ended the year on a surprisingly strong note.”

• While many companies made their operations leaner and more cost-efficient in anticipation of a recession, no recession came, leaving profit margins and balance sheets as the beneficiaries.
  

• S&P 500 earnings jumped 8% versus expectations of 1.2% before companies began reporting. Nothing fends off macroeconomic uncertainty like exceptional corporate profits.

Thanks, Big Tech: Of course, we cannot talk about earnings without mentioning the “Magnificent 7” (Apple, Meta, Nvidia, Amazon, Alphabet, Tesla, and Microsoft), whose earnings rose 59% last quarter.

• Yes, the enthusiasm is palpable in markets, but pointing to irrational exuberance doesn’t tell the whole story, either. Stellar earnings underpin the current rally.

Read more

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🛑 The Case Against Target-Date Funds and Other Passive Investments

Long live target-date funds?

Price & Value: Hedge fund manager David Einhorn is among the numerous high-profile investors sounding the alarm on the large sums of money plowing into stocks and bonds “with regard only to price, not value,” The Wall Street Journal reports. 

• Low cost and simplicity have driven the widespread appeal of most passive investments.
  

• The growth of passive investments is enormous: Passively invested target-date funds held in 401(k) plans are “on steroids over the past 16 years (post the 2008-09 GFC),” the WSJ added.
  

• Vanguard has $1.3 trillion of target retirement funds under management.
  

• Three-quarters of the large plans it administers auto-enroll employees, and 99% of them default to a “balanced investment strategy,” aka a target-date fund. 

Blindly invested? Believe it or not, younger employees will likely have most of their retirement nest eggs in target-date funds. Target-date funds for 2060 and 2065 hold the most stocks — about 90%, while funds targeting retirement in 2025 and 2030 are much more bond-heavy. (Bonds are generally less volatile and focused on providing income.) 

• Some investors see passive investing’s biggest benefit in the ability to do nothing. Owners rarely touch the funds, if ever, and fund managers generally make occasional tweaks to portfolios.
  

• But passive investing enables vast sums to be blindly invested in the market’s biggest names (think the Mag 7), with little consideration paid to intrinsic value. Instead, passive buyers are buyers at any price, and given that more money typically flows into passive investment funds than out of them, it’s a steady force bidding prices higher.

Why it matters:

If critics of passive investments prove correct, investors whose 401(k) balances have soared because of concentrated portfolios could take a bigger hit if/when baby boomers retire and sell large sums of money.

Bottom line: It wouldn’t necessarily help if millions of investors moved their holdings out of target-date funds to actively managed funds. That would mean higher expenses. Not to mention, many active managers emulate big index funds to keep pace. 

• And “an exodus from funds overly dependent on mega-cap tech stocks might itself spark a bear market,” WSJ reports.

Read more on Vanguard’s popular funds

More Headlines

📈 Bitcoin tops $67,000 as it nears all-time high set in 2021

👨‍⚖️ Supreme Court rules that former President Trump can appear on state election ballot

🎥 Dune: Part 2 delivered the biggest opening weekend of 2024, raking in over $80 million

🛢️ The U.S. may ban oil sales from its Strategic Petroleum Reserve to China

✈️ JetBlue officially terminates $3.8 billion pursuit of Spirit

Quick Poll

On Friday, we asked: Has OpenAI misled its investors?

 — Most readers said, “yes.”Among those who said “no” offered up some version of: “Trusting OpenAI at this point with your investments is your own fault.”

 — Another reader said, “it’s pretty evident that AI is not developed for the overall good of humanity, but the few who have the power, knowledge, and resources to capitalize on it.”

See you next time!

That's it for today on We Study Markets!

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