By: Jeff Anderson
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||4.016%|
Source: Wall St. Journal
The last full week of October is in the books and what a week it was. It was an earnings-extravaganza. It was also full of economic data. It would be fair to say that both earnings and economic data were mixed. Some good stuff in there. Some OK-is stuff and some more than not-OK-ish stuff.
GDP came in at 2.6% for the third quarter. Not bad. Certainly not recessionary. At least not yet. Housing was THE big drag. Housing is having a tough time finding its footing (yes, pun intended). Homebuilders are pulling back on construction. Buyers are increasingly skittish, as are the banks’ lending to them. Sellers are living in the past. Living in a bygone era of being able to sell a house above ask, inspections waived, and within days, if not hours. That is what happens when mortgage rates triple! Yes, triple. Mortgage rates topped 7% this week. It has been decades since a seven handle entered the conversation.
Other economic data came in this week. Without boring you on the minutia of all the data points, suffice it to say that things aren’t collapsing. We’re still in expansion territory, however the rate of expansion is slowing. Consumers are slowing down when it comes to buying “stuff.” And this is reflected in sentiment indicators as well as corporate earnings. Google, Microsoft, Amazon, and Facebook, all disappointed investors this week. The biggest miss came from Facebook, and Amazon. Apple was the lone bright spot in tech-land. We love our devices and all the attachments that come with living in the Apple biosphere.
There were plenty of companies that had solid earnings like Caterpillar. The maker of enormous yellow machines that you see building roads, hauling stuff to and from mines is widely considered an economic bellwether. They couldn’t’ be busier. The company grew revenues by 21%, earnings by 49% and posted operating margins that were well above the level seen in the same quarter last year. It kind of flies in the face of the constant recessionary drumbeat we’ve been reading about.
So, what’s the point? Glad you asked. We need to be aware that the world of business is dynamic. We can’t be conditioned to believe that what worked for the previous 10 to 15 years will work the same way over the next decade or decade and a half. It might shock some readers to read this but the ten largest companies in American today will not likely be the ten largest in a decade from now. Look at Facebook. Or Netflix. Both were massive disrupters in their industries. And investors made boatloads of cash. Take Facebook. Was basically THE only social media company for over a decade. They actually HAD to buy Instagram. It was too big a competitive threat not to. Now you have TikTok, Snapchat, and a host of other social media sites. When Netflix was in its infancy, it completely changed the way we consumed movies. Blockbuster was stuck in the old world with no way to survive. Now you have Amazon Prime, Disney Plus, and a host of other platforms that compete with Netflix. Netflix redefined that industry, and again, investors were paid handsomely for it. That is now over. The heyday of triple digit subscriber growth and buying content for peanuts is long gone. That is not to say Netflix is a bad company or that they won’t earn decent returns for investors in the future. They simply won’t deliver anywhere near the returns they did in the past. Let’s not cling to the past. Let’s move on. Adapt. Understand that capitalism is the machine that eats itself in order to nourish, replenish and strengthen.
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