One category that’s seen a particularly high level of inflation is travel, with airline fares up 28% from a year ago. Yet, one of the strongest areas of consumer spending has been vacation travel, which, by the way, is considered a discretionary expense.
On the matter of discretionary spending, Bank of America analysts recently found ”consumers do not necessarily dine out less during downturns, but rather they tend to shift to cheaper restaurants.”
That brings us to one of my favorite quotes from the recent earnings season.
It comes from Lamb Weston LW 0.11%↑ , the $11 billion potato processor that supplies frozen french fries to your favorite restaurants including McDonald’s. During the company’s July 27 quarterly earnings call, CEO Tom Werner called attention to the “fry attachment rate” (via The Motley Fool):
Despite pressure on overall restaurant traffic, the demand for fries remain solid as the fry attachment rate in the U.S., which is a rate in which consumers order fries when visiting a restaurant or other food service outlets, remains above pre-pandemic levels.
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In other words, when people go out to eat, they’re not allowing their deteriorating sentiment toward the economy affect their decision to order a side of fries.
Here’s a little more color from CFO Bernadette Madarieta:
Overall, we expect U.S. demand to remain solid, but will also likely be affected by significant inflation that consumers are facing. In the event of an economic recession, we expect demand for French fries will be resilient, although with little to no growth. That's consistent with what we experienced during the great recession from 2008 to 2010.
While the worst economic crisis since the Great Depression might’ve stalled growth, it wasn’t enough to get people to stop ordering fries.
Fascinating stuff.
In case you missed it
🙋🏻♂️ Many of you became new subscribers in recent months. (Welcome!) Some of you haven’t had the time to open all of the newsletters. (We’re all busy!) Some of you are free subscribers looking for a reason to become a paid subscriber.
For all y’all, here’s a roundup of some of TKer’s most talked-about paid and free newsletters. All of the headlines are hyperlinked to the archived pieces.
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks. From January 1995 through April 2022, 728 tickers have been added to the S&P 500, while 724 have been removed.
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. According to their research, 29% of 791 large-cap equity funds beat the S&P 500 in 2019. Of those funds, 75% beat the benchmark again in 2020. But only 9.1%, or 21 funds, were able to extend that outperformance streak into 2021.
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P has seen an average annual max drawdown (i.e. the biggest intra-year sell-off) of 14%.
“While valuations feature importantly in our toolbox to estimate forward equity returns, we should dispel an oft-repeated myth that equity valuations are mean-reverting,” Goldman Sachs analysts argued. “…there is only 26% confidence that the Shiller CAPE is mean-reverting, and 74% confidence that it is not.”
Media outlets sometimes unfairly characterize a new piece of data as they attempt to draw attention from their audiences. The November 2021 jobs report came with a lot of mainstream news headlines suggesting that the creation of 210,000 jobs was a bad thing. Nine months later, we’re learning that the labor market boom continues without interruption.
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 22% of the stocks in the S&P 500 outperformed the index itself from 2000 to 2020. Over that measurement period, the S&P 500 gained 322% while the median stock rose by just 63%.
After reporting disappointing quarterly results in February, Meta shares plunged 26% in a single trading day. After losing an eye-popping $251 billion of market cap, the social networking company quickly went from being the sixth largest company in the S&P 500 to the seventh. It’s the kind of move that could’ve rattled the confidence of investors and traders with positions in other stocks. And it did: That same day, the S&P 500 fell 2.4%. But losing 2.4% isn’t remotely close to losing 26%. That’s diversification at work.
Published on Dec. 5, this newsletter showed Wall Street strategists were anticipating the S&P 500 to end 2022 somewhere between 4,400 to 5,300. The market is currently trading below the most bearish strategist’s target. Who knows? Maybe the market will surge during the final months of this year. That said, I think this excerpt from that newsletter was noteworthy:
⚠️ It’s incredibly difficult to predict with any accuracy where the stock market will be in a year. In addition to the countless number of variables to consider, there are also the totally unpredictable developments that occur along the way.Strategists will often revise their targets as new information comes in. In fact, some of the numbers you see above represent revisions from prior forecasts.For most of y’all, it’s probably ill-advised to overhaul your entire investment strategy based on a one-year stock market forecast.Nevertheless, it can be fun to follow these targets. It helps you get a sense of the various Wall Street firm’s level of bullishness or bearishness.
Five stocks (Facebook, Apple, Amazon, Microsoft, and Google) account for a massive share of the market capitalization of the S&P 500, which consists of 500 companies. While it may be technically accurate to say these five stocks represent five companies, it’s also a gross oversimplification of the businesses and markets these companies are exposed to.
Peter Lynch, the legendary stock picker who ran Fidelity’s market-beating Magellan Fund for 13 years, made a prescient observation in a speech he gave to the National Press Club back in October 7, 1994: “Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years … Because profits go up 8% a year, and stocks will follow. That's all there is to it.“
The stock market can be an intimidating place: it’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
