Recession … Where? - Market Update Jan. 30 - Feb. 3
A little extra sleep, a little more slumber, a little folding of the hands to rest.
Then poverty will pounce on you like a bandit; scarcity will attack you like an armed robber.
-Proverbs 6: 10-11
Everything compounds. Laziness compounds. Hard Work Compounds. Which do you choose for the rest of 2023?
Welcome back to the Rambling Mind Newsletter, this is your Market Update
This newsletter is 11 mins and 2300 words
Markets
Tale of the Tape
Economy
🚀US Economy Grew
The Recession that everyone has been predicting for the last year is nowhere to be found. GDP (Gross Domestic Product), the measure of economic activity, was released on Thursday and it blew expectations out of the water.
🔢By the Numbers: GDP Grew at a 2.9% annualized pace in Q4 2022
Economists expected that the economy would decline in the last quarter
The economy has regained all lost output due to the Covid Pandemic induced recession
The economy has already returned to its growth trajectory prior to the pandemic
Real GDP which accounts for inflation is at its highest level EVER
Takeaway: The Fed might have achieved the goal of a soft landing, where it would be able to fight inflation but not throw the economy into a recession. A key ally for the Fed has been the labor market, despite all the tech layoffs, the labor market has remained very strong over the last year.
BUT: Just because we have avoided a recession so far, does not mean it cannot happen. There were a few negative signs within the GDP report that can be seen as warning shots:
Consumers are not spending. With higher prices, consumers are finally saying NO MAS to companies and leaving their wallets at home
The housing market is getting smacked. Prices dropped 27% in the last quarter as interest rates have gone up
Companies are reducing their spending (see Tech as a prime example of budget cuts)
Non-tech companies are beginning to announce layoffs as well: Hasbro, Dow, 3M, and SAP all announced layoffs last week
My Takeaway: Things are good for right now but could change instantly. It is in our best interest to take all the precautions necessary for our lives. As Morgan Housel says, "Save like a pessimist." Expect the worst. Plan for the worst. This will allow you to enjoy the best.
💰Small Refund
Unfortunately for most of us, when we get that Tax Refund money. It might be a bit lighter than what we got last year.
Why?: Many of the enhanced benefits that were put in place to help parents during the pandemic have been rolled off or reduced.
🔢By the Numbers: Per Axios:
The enhanced child tax credit is gone. Parents who received $3,600 per child during the flush times will now get $2,000.
The Child and Dependent Care Credit, a break that helps working parents pay for childcare, returns to a maximum of $2,100 instead of $8,000
During COVID, taxpayers could take a $600 deduction for charitable donations even if they just took a standard deduction. Now, only those who itemize can deduct charitable payments
The Earned Income Tax Credit is lower than last year for taxpayers with no children.
However, there is a new benefit for EV buyers. You could qualify for a $7500 tax credit.
😡Takeaway: The US Tax system is unnecessarily complex. The IRS knows exactly how much I earn and could just send me a bill if I owed and a check for a refund. Instead, we have a convoluted system that puts pressure on those on the lower end of the income scale to figure out all the nuances of the tax code. The current tax system benefits those with a higher income because opaqueness allows for more ways to skirt by. This is why politicians will never do away with the system. Most of them are stupidly rich so they need the consistent loopholes and opacity of the tax system.
My Takeaway: I am too lazy and now scared (a story for another day) to do my own taxes. Shout-out to my girl, Blessing for helping me with my stuff. Go check her out if you need a tax specialist. Definitely has made my life a lot easier.
⚠Biggest Takeaway: DO YOUR TAXES EARLY!
It's been a bit of a downer talking about tech layoffs coming in by the boatloads. However, there is one industry segment that does not have nearly enough workers. That is in Cybersecurity
🔢By the Numbers: There are only 68 cybersecurity workers for every 100 open roles.
There is a need in the US for another 530,000 workers.
Takeaway: As Charlie Munger says, "Fish where the fish are." Businesses are not going to play with their cybersecurity needs. This could also be a good investment note for those of us who are into buying stocks.
Earnings
We finally see why Microsoft was making major cuts to its costs by firing 10,000 workers. This was not a good quarter for Microsoft at all. Growth has slowed considerably over the last year for Microsoft.
🔢By the Numbers: Microsoft missed revenue expectations and barely beat earnings aka profit expectations.
Revenue: $52.75 Billion versus an expected $52.94 Billion
Profit fell from $18.77 Billion last year to $16.42 Billion
Microsoft is also not expecting major revenue growth in the next quarter. They "only" expect to make between $50.5-$51.5 Billion dollars in the 1st Quarter of 2023.
What Happened?: Slowed growth in its biggest revenue engine, Azure Cloud services. Azure grew by only 31% which is the slowest rate of growth for the company. As fears of recession compounded, businesses slowed down their investment into future technology and upgrading equipment. Like most of us who put off upgrading our phones or laptops when times seem a bit tight.
What's Next: Microsoft expects growth to continue slowing down across the board as businesses hold tight to their dollars.
Key Takeaway: Microsoft, like every other tech company, rushed to meet the demands of the pandemic with the expectation that the pandemic had changed the world forever. They over-hired and now it is costing the company the high margins they have enjoyed for decades. With a slowdown in revenue and profit growth, Microsoft is back to focusing on the dollars and cents of the business.
👎🏾Bad Takeaway: This might not be the end of layoffs as the reality of revenue slowdown sets in.
My Takeaway: As much as I hate layoffs from businesses, this shows good management from Microsoft to immediately make decisions to change things within the company. I would prefer for them to take the Apple approach and grow more steadily.
Another reminder of why it is always good for us to protect our downside. In this situation, it is having that Emergency Fund. We do not all work for tech companies that provide the best severance packages that include: multiple months of pay, stock vesting, and health care coverage for months.
Tesla smashed on all parts of its report. This was with Chinese shutdowns limiting how many cars they were able to produce and sell.
🔢By the Numbers: Hitting both record revenue and record profits.
Total Revenue was $24.32 Billion a 56% increase Year over Year
Profit was $3.29 Billion a 103% increase Year over Year
However, the record revenues and profits mask a bigger issue for Tesla.
Gross Margins on their cars fell from 30% last year to 26% this year
Why?: Tesla is no longer the only Electric Vehicle manufacturer. It is finally facing competition from other car manufacturers who are flooding the market with different styles of EVs at a variety of prices. It appears Tesla's brand power is not as powerful as we had thought. Here is an example of the shine wearing off:
Tesla no longer leads the pack in assisted driving. Ford had taken the lead. Tesla's system is now just in the middle of the pack.
Key Takeaway: Tesla has begun to cut pricing on its cars to make them more appealing to buyers. Two weeks ago, Tesla cut prices by $10,000.
But do not be mistaken. There is still high demand for Tesla. They are expecting to sell at least 1.8 million cars this year which would be a 50% increase in sales. But with more competition and more options, Tesla's basic minimalist style is no longer as attractive as it once was. Plus Elon is no longer the untouchable he once was.
My Takeaway: Tesla will be fine. It still has the best charging network in the world and still has a very strong brand appeal even with Elon being Elon. But competition is quickly stealing market share from them. For example, once upon a time my brother and I wanted Teslas. Now we have no desire for one anymore. We would rather have the Rivian RT1 or F150 Lightening or Porsche Taycan.
Other News: Tesla announced it will be spending $3.6 billion to build two new factories in Nevada to produce its Tesla Semitrucks and batteries.
Stats of the Week
The heads of the biggest US companies made 399 times more than the average worker in 2021, according to the Economic Policy Institut
A 20x increase in CEO pay since 1965.
However, come CEOs have taken a pay cut this year.
Apple's CEO Time Cook took a 50% pay cut and will "only" make $49 million this year.
Solomon David, CEO of Goldman Sachs, took a 29% pay cut and will only make $25 billion
Google, Morgan Stanley, and JP Morgan have all announced pay cuts as well
These pay cuts are nothing more than virtual signaling. According to a study from Oxford
Companies that prioritize paying employees over managers in difficult times tend to get a better rep with customers. It can also be a way to placate disgruntled shareholders who are not too pleased to sponsor the caviar-filled lifestyles of company leaders as they watch their investments dip into red territory.
Unless I see substantial pay cuts I'm not gonna be out here cheering any of these dudes as they do massive layoffs.
Last weekend, Avatar: The Way of Water topped $2 Billion at the box office
It is the sixth movie in history to reach this milestone.
The other five are Avatar, Titanic, Avengers: Endgame, Star Wars: The Force Awakens, and Avengers: Infinity War
Do you know what all the movies have in common?
They are all owned by Mickey Mouse aka Disney
The average hourly wage Walmart will be paying its workers moving forward
Walmart says about 340,000 or about 20% of its total workforce will see a major pay increase
As the labor market remains tight for retail jobs, competition for these workers remains high
Target in March of 2022 increased their minimum wage to $24/hour
Amazon in September of 2022 increased the minimum wage to $19/hour
The amount Amazon is charging for a generic drug subscription service called RxPass. This is an add-on service for Prime members
RxPass will be available in most states minus Texas and California.
It will provide generic drugs for things like high blood pressure, anxiety, acid reflux, and hair loss.
Unfortunately, this will not be available to people on Medicare or Medicaid
This is another way for Amazon to get people into the Prime program.
Looking Ahead
Economy
The Labor Market will be in the spotlight next week. On Wednesday, the JOLTS (Job Openings and Labor Turnover Survey) report will be released. This tracks job openings, hires, quits, and separations for the month of December. Also on Wednesday, ADP will release its National Employment Report tracking growth in the private sector payrolls in January. The week will be closed out by the Labor Department releasing nonfarm payrolls for the month of January. It is expected that 185,000 jobs will be added to the economy a major slowdown from the 223,000 we had in December.
On Tuesday, the Fed will hold its two-day Federal Open Market Committee. On Wednesday, Jerome Powell will announce the Fed’s interest rate decision. It is expected for the Fed to increase rates by 25 basis points to 4.5%.
📈Earnings
We got a heavy load of earnings coming our way this week with some of your favorite companies reporting 2022 Q4 earnings. Analysts expect to see a lot of pain in companies’ earnings. It is expected for revenues to have stagnated due to higher interest rates, as higher interest rates tend to force growth companies to slow down.
Sports I Love
Premier League has been on break for the last two weeks as tournament games are being played. Man U beat Reading not much to be said on that front.
The NBA is swinging into high gear as the NFL season is coming to a close so expect a lot more NBA updates in the future. For now, enjoy an outraged LeBron and a ridiculous Patrick Beverly after the ref missed a foul call on LeBron. My man literally went to the sidelines and grabbed a camera to show the ref he missed a call. Talk about being PETTY!!
Interesting Reads
Evolution of Pick-Up Trucks in the US and how people no longer use them for pick up things. Rather just to express themselves in a specific way.
*I am a shareholder of Microsoft Stock.