🎙️ Tricks for Treats

🎃 It’s believed that Halloween (tomorrow!) traces back more than 2,000 years, in what is now Ireland, when Celtics celebrated the end of the fall harvest and the beginning of the long, dark winter.

Today, it’s mostly an American thing, with plenty of Hershey’s, Twizzlers, KitKats, and, recently, Barbie costumes. Hey, Ken!

Once sugar rations ended post-World War II, Halloween candy took America by storm.

— Matthew & Shawn

Here’s today’s rundown:

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

• The S&P 500 enters correction territory

• Hedge funds’ love of uranium

• The reasons Americans can’t stop spending

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

CHART(S) OF THE DAY

IN THE NEWS

📉 The S&P 500 Enters Correction Territory

On Friday, the S&P 500 officially hit correction territory, down 10% from its July peak for the year and about 14% from the January 2022 all-time high.

What was once a year-to-date gain of 20% is now around 8%.

• Alphabet shares were hit hard after earnings last week, and Meta warned of softer ad spend. Even Microsoft, which posted strong momentum in its cloud division, is down about 8% from its summer peak. Nvidia is down nearly 20% from its peak, as well as Chevron, Ford, and Moderna.

• Higher returns (aka “yields”) on government debt, like U.S. Treasuries, also make the opportunity costs of owning stocks higher, hence the harsh reactions to Big Tech earnings that don’t hit it out of the park.

Slow-motion sell-off: Drops of 10% and 15% happen nearly every year, as you’ll see in the chart below. 

• The latest dip comes after the market surged in the year’s first seven months, enthusiasm backed by artificial intelligence, falling inflation, and the (expected) end of the Federal Reserve’s interest rate-hiking campaign.
  

• But stocks are slated to close out October with their third straight month in the red, the longest monthly losing streak since early 2020.
  

• Said one market strategist at Citigroup: “It’s been a bit of a slow-motion sell-off. Sentiment is generally negative…but stress metrics haven’t moved that much, it’s been relatively orderly.”

Why it matters:

Commentators have for months been sounding the alarm on a big market crash and recession, though indices are in the green this year. The U.S. economy grew by 4.9% on an annualized basis last quarter, its fastest rate in two years; inflation has come down; and consumers continue to spend (more below). 

• Added another “cautiously optimistic” strategist: “It’s easy to get distracted by some of the moving parts and the event risk, but the bottom line is that the underlying macro picture is still strong.”
  

• Valuations for many stocks are in the average to above-average range, aside from Big Tech, which looks stretched. 

The bulls and bears: Poll the public and famous investors on whether they’re “bullish” or “bearish” and you’ll rarely get consensus. When you do, it’s usually the sign of an extreme. 

• Legendary investor Peter Lynch, who returned 29% annually during his 13 years managing Fidelity’s Magellan fund, told Barron’s in a recent interview that many stocks are trading at cheap valuations.
  

• “We’ve been in an incredible bear market for two years,” excluding the Magnificent 7, he said. “I love it when stocks go down,” adding that he’s “absolutely” optimistic about the stock market from here. 

Meanwhile, Seth Klarman told Barron’s that “the market is scary and vulnerable” — it is Halloween week, after all. 

• Kidding aside, he noted the geopolitical strains as headwinds. He also said we’re just now facing the consequences of the Fed holding rates so low for so long before March 2022.

Read more

RECOMMENDED READING

Richer, Wiser, Happier is like several lifetime’s worth of knowledge from the best investors to ever live, jam-packed into one incredible book.

Says Tony Robbins, it’s “A brilliant book packed with powerful insights from the world’s most successful investors.”

Plus, The author, William Green, hosts a deeply insightful podcast through our company (The Investor’s Podcast Network) with the same name as the book.

☢️ Hedge Funds Pile Into Uranium Stocks

There are two types of investors: 1) Those who have been following uranium’s boom this year, and 2) those who are just now learning/realizing you can invest in uranium (both directly and indirectly!).

Okay, there are investors not captured by those two choices, but the point remains — uranium is a very niche financial asset despite exceptional returns in recent years.

• And some hedge fund managers love betting on uranium, given its role in powering nuclear energy, which many see as the most viable pathway for the world to achieve carbon neutrality.

Gone nuclear: The Sprott Physical Uranium Trust (ticker: SRUUF) is just what it sounds like: An investment product that physically stores uranium and provides investors with the most direct exposure to up-and-down movements in prices for the “yellowcake” commodity — uranium.

Year-to-date, the Sprott Uranium Trust is up almost 40% and has nearly doubled since early 2021 when it first began trading.

• But hedge funders aren’t just betting on uranium itself being worth more; some expect stocks for uranium producers to have even more upside.

Why it matters:

Uranium has been on Wall Street’s mind for a few years now, with assets managed by uranium-related ETFs skyrocketing 20x since 2020, according to Bloomberg.

And the financial speculation isn’t without good reason — the International Energy Agency estimates that global nuclear-energy-production capacity must roughly double from current levels for global governments to meet their net-zero commitments.

• Demand for uranium is on the rise, thanks to older nuclear reactors in Europe having their lifespans extended (to offset a dropoff in oil & gas flows from Europe) and China continuing to aggressively build out its fleet of reactors.

Yellowcake shortage: With Russia sitting on around 8% of the world’s recoverable uranium stores, Western countries are looking for new supplies in a market that’s already very out of balance, as there’s much more expected demand for uranium than what’s actually being produced.

Hence, the interest in uranium-miner stocks.

• One hedge fund portfolio manager added, “We’re most focused on uranium miners in public markets. For the supply and demand of this market to balance, we need new (uranium sources) to come online.”
  

• Another said, “Once governments wake up to how useless weather-dependent power is, they will go next to nuclear.”

Read more

MORE HEADLINES

🍔 McDonald’s revenue climbs 14% as price hikes boost sales

🚗 Why are cities cracking down on free parking?

📉 Carl Icahn’s investing arm’s stock falls to 19-year low

🤝 Auto workers’ labor union reaches tentative deal with General Motors on strike

💻 Apple’s “Scary Fast” Mac announcement event

🛍️ The Reasons Americans Won’t Stop Spending

The economy is hanging in just fine. By some accounts, it’s running hot. 

What gives? Part of it lies in consumers’ spending habits. Why are Americans still willing to spend in the face of high inflation and recessionary fears?

• Strong labor market: With low unemployment, Americans feel confident about their job prospects and paychecks.
  

• Resilient savings: Stimulus checks, a strong stock market the past decade, and higher incomes have helped people save.
  

• Rising home values: The value of American homes has surged in recent years, especially since the pandemic began in 2020.

Americans are still packing movie theaters and concerts, enjoying vacations, buying cars, and dining out. Said one senior analyst: "The death of the U.S. consumer has been vastly over-exaggerated.”

Weathering the storm: During the Great Resignation, when people quit jobs at historic rates in 2021 & 2022, many stood to benefit. Said one person who doubled his salary: “When so many people quit at the same time, I actually saw an increase in my value to the company.” 

• Employers continued to add to payrolls at a strong clip. Job openings exceeded the number of unemployed Americans seeking work by more than three million in August, and wage growth (4.2% last month) is outpacing inflation (3.7%), which has cooled since mid-2022.
  

• “The strength of the labor market and the strength of household balance sheets has helped Americans weather some of that storm” of inflation, said one Glassdoor economist. 

Why it matters:

The average 30-year fixed mortgage is near 8%, preventing many would-be and first-time buyers from stepping into the game with a home purchase. 

But Americans locked in low mortgage rates in 2021 or prior tend to have more cash for home improvements, trips, and restaurants. 

• Get this: Roughly 90% of mortgage homes have a rate below 6%, per economists. That’s a figure you don’t see every day; simply put, most people don’t have a high rate. 

Breaking point? Americans’ credit card balances rose 4.6% earlier this year, topping $1 trillion, according to the New York Fed. More Americans are seeking hardship withdrawals from their 401(k) accounts. 

• And about 60% of Americans said they’ve fallen behind on emergency savings this year, per Bankrate. In September, Americans saved 3.4% of their income, about half what they saved in 2019, per the U.S. Commerce Department. 

Read more

QUICK POLL

On Friday, we asked: How closely do you pay attention to earnings season?

—About 43% of readers said they pay some attention here and there.

—32% of respondents said “very closely,” and they monitor most major reports. Wrote one reader: “These reports are the most important reports to understand company results.”

—About one-fourth of you rarely or never pay attention to earnings season

See you next time!

That's it for today on We Study Markets!

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