Mullooly Asset Management
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All Hail the Mighty Consumer: Spending Carries the Economy
What might you not know about profit margins, earnings, and the economic sentiment that you absolutely should? Get ready for a profound discussion as we break down Ryan Dietrich's intriguing article, 10 Things You Might Not Know, But Should. We unravel the mystery behind rising profit margins, putting a spotlight on the shifting focus of tech behemoths from income growth to profitability. Delve into the world of earnings and the crafty play of managing expectations to boost future earnings beats. Fascinated by Meta and Facebook's stock growth despite a few earnings misses? Stick around as we unfold the impact of these earnings reports.
Ever wondered why sentiment surveys of manufacturing might not be painting the accurate picture? Join us as we dig deeper into this conundrum, contrasting strong economic indicators with the public perception of an impending doom. As we dissect the third quarter of 2023 and the latest GDP report, we expose the manipulation in media narratives aimed at clickbait. Don't miss out as we demystify the average drawdown of recessions and why panic can massively inflate it. Finally, we round off with a worthwhile lesson about the natural ups and downs of the business cycle, preaching preparedness over panic. After all, stocks can dip lower but they can also rise higher!
Hello and welcome back to the Malooly Asset Podcast. This is episode 460. I'm your host, casey Malooly, joined at the table by Tom. Back at it again, let's go. This week we're going to be referencing an article from Ryan Dietrich, who's with Carson Group. We use his stuff as a jumping off point for podcasting videos quite frequently and this one we're going to be discussing the article. His title was 10 Things you Might Not Know, but Should. I don't know if we're going to get to all 10, but we might get to eight or nine of them.
Speaker 2:They're all very good, and they're all a little bit in contrast to what you might be hearing on the news or seeing in the headlines. So let's jump right into number one. Profit margins are increasing.
Speaker 1:So I think we should start out by talking about what is what's a profit margin? I think that that is going to be helpful context for the listeners. I know profit is revenue minus costs, so profit margin is profit over revenue Right.
Speaker 2:So if you make a dollar 12 and your revenues are a dollar 12 and your costs are a dollar, your profit margin is 12%. So when we hear profit margins are increasing, what that means is, compared to a previous time, previous quarter or previous year, the margins are actually getting bigger.
Speaker 1:So there's two ways that that can happen. Either their profits can grow or their costs can be reduced, and I think that that was something that was a theme last year was these, especially these big tech companies, were focusing more on profitability instead of just growing their income. They were taking a good look at their internal business structures and trying to reduce costs, and now we're seeing that come through fruition with this increasing profit margin overall.
Speaker 2:What just baffles me, as someone who's been at this for decades, is that I see that profit margins are increasing. You see it. Ryan Dietrich, who wrote this post, sees it. Why is it these folks on the financial TV networks and websites are saying that profit margins are not increasing. In fact, they're shrinking. Where are they getting their information? It doesn't add up.
Speaker 1:I'm not sure. I think it seems like other than their incentive of getting eyeballs or clicks or whatever. I think that is always the case with these new sources and unfortunately that's something that we're always going to have to rally against them and make people focus on the actual numbers and not just what they're hearing.
Speaker 2:Let's move on to number two. And number two is earnings should hit an all-time high next year. Funny thing about the stock market it tends to look at interest rates and earnings, and if earnings are going to hit an all-time high next year, that's good, right, it sounds good.
Speaker 1:I think that's kind of what we. When you really boil down to investing, I think it really boils down to the underlying fundamentals of the companies that make up the indices that we talk about all the time, like the S&P 500 or the NASDAQ, and when you boil down the fundamentals of those individual companies, one of the most important factors is what their earnings are, and you compile all those together and you can project earnings for the overall market. The last two years or so, 18 months, earnings haven't been growing quite as much as they had been in the previous several years, but they're not. They're not going down. They're not going down, they're just moving up.
Speaker 2:They're not going up as fast as they were previously. Right, we always want to look ahead, the market looks ahead and the market looks at what earnings are going to be like. So I'm a little surprised that, as these companies have been reporting earnings these past few weeks, I See lots of silver linings and what they call green shoots of things that are coming in the next few quarters. That Keep me very optimistic. But there's been a lot of people who have been hitting the sell button Just because a company didn't report. They were a penny light on their earnings. I Don't, or they didn't, like the when all of the earnings came from, which different areas. So I think people are using Events as sell decisions and that's never really a good, a good thing. One other thing I'll mention about earnings is when a company reports earnings today, that's over. It's telling you what happened in the last three months. What's more important is that they get to the earnings report, that it's in line or close To what everyone was expecting.
Speaker 1:And here's our forecast for the next three months right, there's no such thing as a good or bad earnings report. It's Better or worse than expected and I think that those expectations I know we talked about last year how the CEOs of these big companies that do the earnings calls and they, you know the numbers get released and then the CEOs or CFOs or whoever goes on a call and talks about what they're seeing in the business and something that happened last year and I think has has continued to Happen this year has been this this is in line with the increasing profit margins, is they? They want to talk down these expectations and get their expectations lowered so then they can hopefully have an earnings beat next year, bill.
Speaker 2:Gates was the. He made that model. He was perfect at doing that.
Speaker 1:Yeah, I'm thinking about you know. I know we don't like to talk about specific companies on the podcast, but meta or Facebook, last year took a beating because they had a couple of less than stellar earnings reports. And then they Mark Zuckerberg was talking about last year was efficiency, profitability, and At the time nobody liked that. But now fast forward to 2023 and the stock is One of the strongest that we have in the market right now. So not a recommendation to buy or sell, of course, but you know, you kind of have to Know what to pay attention to and, like you said, you know a penny here or you know 5% drop in growth right there, I'm just pulling numbers out of a hat, but I think the earnings, the big earnings, reactions are more about what people thought the company was going to, what the earnings were going to be, and less about what that means moving forward.
Speaker 1:So a lot of like the pops or big drops we see next day after an earnings report, it's more about getting back. It's more about what the expectations were and whether they were too high or too low. So I think that's important to keep in mind when we always talk about earnings.
Speaker 2:Alright. Number three student loan payments coming back could crush the consumer. I guess crush should be an air quotes you talked about. A lot of student loan payments are now resuming, but it doesn't mean that the consumer is going to stop spending.
Speaker 1:It doesn't necessarily this one. I don't know. I think it's still too early, because student loan payments only started this month. We're recording this at the end of October and they technically started in this month, in October. I don't know if one month of data is really something that we can extrapolate into the future. I think the data clearly shows that the consumer is strong, but I don't know if we can say that you can factor in the student loan data yet.
Speaker 2:I think the average student loan payment I read somewhere was less than $300 a month, and I think if you're going to spend money, you're going to spend it. The bottom line that Ryan Dietrich put out was that, despite student loan payments starting again, we've seen virtually no slowdown in spending, and we've heard that from companies like Mastercard and Visa and some of these other financial firms as well.
Speaker 1:They would know. They would know. And I also think you have to consider the demographics of who's making student loan payments, because student loan payments, you think are probably mostly millennials, and millennials are also the people that are starting families, buying houses, they're coming into their prime working years and I think buying houses and having babies and growing families are you're not going to spend less money when that happens. You're stimulating the economy. Yeah, it's kind of like I said, a demographic. You kind of got to take that into consideration as well.
Speaker 2:So number four we've heard that manufacturing is falling off a cliff. Not necessarily so. It turns out that these sentiment surveys that we've seen from Michigan are suggesting a meaningful slowdown, not quite yeah.
Speaker 1:Ryan wrote that manufacturing is actually up 2.1% this year, and I think that just goes to show that surveys are misleading.
Speaker 1:I think, just throwing a blanket over them Surveys. It just kind of goes with the theme of the overall economy right now. I think if you surveyed everybody and they have, and I think that's one of the disconnects is all of, not all of, but the majority of economic indicators and economic statistics at this moment in time are signaling strength and everyone feels the opposite. Everyone thinks the economy is crumbling and it's just, it's perplexing, and I don't. I don't think there's one thing that you can point to and say. That's why everyone thinks it's worse than it is, but I think that does seem to be the case in a lot of different areas.
Speaker 2:Something I've learned over the years when it comes to surveys. My own conclusion people lie. They say what they think you want them to say, and if you're filling out a survey for the Bureau of Labor and Statistics or some other organization, that's gathering data. It's non-binding information. It's not like they turn this over, this information over to the IRS. Oh, you had an employees this quarter. No, you can say whatever you want to say. Like you just mentioned, the feeling out there is that things are bad but the reality is showing something else. You could say that for just about every single point that we're going to talk about in this podcast.
Speaker 1:Yeah, I think the biggest one. I know this is timely and we got the GDP report out uh this week for the third quarter of 2023 and it was up 4.9 percent, which was over all of the expectations. But the headline on the Wall Street Journal was something to the tune of summer slowdown, unlikely to conti or summer spending, unlikely to continue in the future. Not, american economy just had the best quarter in recent memory in terms of GDP. They said it's not likely to continue, but what really happened was it was the best quarter for GDP, which you know is productivity of the country the best measure of the economy that we have.
Speaker 1:So I think again goes back to that media narrative trying to do whatever they can to get clicks, and it's unfortunate that that's the world we live in, but it is. So what's number five on the list?
Speaker 2:here. Number five is no. A recession isn't around the corner. There's still a lot of well-known people out there who are calling for a recession.
Speaker 1:They have been wrong for a year, I'd say two, or, you know, 18 months, at least I think what's the Peter?
Speaker 2:Lynch quote Economists have predicted nine of the last two recessions or something like that.
Speaker 1:I was thinking about the one where he said more money has been lost preparing for a correction than actually during corrections themselves. So what he meant was you lose a lot more money when you think something is going to happen than actually withstanding that thing that you think is going to happen. And I have some numbers that were shared by first trust to back up that claim. So the average drawdown they looked at every recession going back to 1948 over that time period, 12 recessions over that time period the average drawdown of those, the average drawdown during those receptions, was 30 percent. But the average return during the entire recession was actually a positive 3.81 percent. It's positive though the average return is positive. During a recession you just can't get panicked at the bottom and sell out. People do do it.
Speaker 2:We've seen it. We've seen it in living color. I think that stat also shared that if you were to omit the recession of 2008 and 9, the numbers get even better.
Speaker 1:Yeah, it's like 6 6.8 return, percent return or something close to that. So I Think that that speaks to you know, having the proper allocation going into it and, like I said, not getting spooked at the bottom.
Speaker 2:So it's also important to remember that the money that you've got invested in stocks is for a much longer period of time than between now and next Friday, and so you need to just keep in the back of your mind. When we do Get close to or tip over into a recession, stocks will move quickly In both directions. They'll go down very quickly. They tend to come back very quickly. So, like Casey said, don't lose your head.
Speaker 1:Yeah, also the average. This is also from first trust, but the average length of a recession is 13 months. I know we we talk about how we like to have the next. If you're taking money from your portfolio, from your investments, we like to have the next one to three years of those distributions in cash. If you have that money in cash, it's not losing its value. You can let the other side or the stock portion of your portfolio you don't have to touch it and you can, you can withstand that 13 month average length of these recessions that they've tracked.
Speaker 1:And then, one year after the average return, one year after recession 21.25%. Three years after recession ends 49.13%. Five years after 94%. I'm repeating myself, but just don't. Word is worth repeating, worth repeating and you just gotta, you got to be prepared going into these things because of recession, as I know we're talking about how we don't see one in the next, you know, in the in the near future, but they are a natural part of the business cycle and there will be a recession at some point in the future and someone will be able to take a victory lap on CNBC and say, hey, I called this one, but that's not a game we're willing to play here.
Speaker 2:It's not worth it. So, along the same lines, the next point from Ryan Dietrich was stocks can go lower, but they could also go higher. He talked specifically about the NASDAQ. The last I should say the first six months of this calendar year were the best for the NASDAQ Think ever was up like 40% yeah, and also the best first seven months for the S&P 500 in Almost 25 years.
Speaker 2:So stocks have gone through some normal seasonal weakness August and September. You don't want like to go buy the calendar, but it's just a quirky thing. They tend to be soft. We're seeing now that once you get near the end of October things tend to firm up and Do a little better. Historically doesn't mean it's gonna happen this year. This looks like a normal digestion period for the markets. Nobody likes to hear that.
Speaker 1:Yeah, I think it's. It's important to have that context because you know like we talk about all the time, markets don't move in straight lines. So to see it, you know we're ballpark 10% correction territory. I don't think we're officially there yet, but we've been around that level for the last couple weeks here. But 10% corrections are normal occurrence in the course of. You should expect one every year, I'm pretty sure of the statistics say a 10% correction.
Speaker 2:It's pretty close. We've had something like 89 Corrections of 10% or more in the last 92 years. Yeah, about once a year.
Speaker 1:It's far from abnormal to see a 10% correction after 40 or 25% Pop to start the year. So, yeah, I think important to have that context and what? What's next on the list here? What do we want to talk about next?
Speaker 2:I want to just skip ahead to, I think, maybe the most important piece on the list, and that is that the consumer is in really good shape. We have talked about this on several videos and several podcasts. I can't stress enough if the consumer is strapped or if the consumer is in trouble, it's bad. It's bad for the economy because the consumer represents something. North of 70% of the US GDP comes from consumer spending, and so when we see consumer spending slow down, that's a that's a caution flag.
Speaker 1:Yeah. So Ryan wrote about how the Fed has found that Household net worth has increased by 37% in the last three years.
Speaker 2:37%, that's a big jump not necessarily in places, you would think, not in the stock market or your 401k. Where are we finding it? Houses.
Speaker 1:Savings, excess savings that's been a big storyline the last year or two.
Speaker 2:That increase in household net worth fastest pace we've seen Since they started tracking this data.
Speaker 1:I think it's. It's also important, I think, the consumer is. I Hate making predictions, but I think the consumer is probably gonna continue to be in good shape as long as we have the unemployment rate where it is, because if people have jobs, then I think everything is Probably gonna be okay from a from a spending standpoint.
Speaker 2:It's pretty interesting to see some of the secondary indicators that are out there that don't get talked about enough, but things like Late payments on autos at very low levels, delinquencies on credit card payments near zero, defaults on mortgages again at historic lows. The consumer is certainly not strapped. I don't know where they're gonna spend their next couple of bucks on, but that's certainly not the problem.
Speaker 1:Yeah, so I think that's gonna do it. We didn't make it all the way to all ten points that Ryan shared in his article, but if you're interested, would we get seven? I think so. So we got. We missed three. If you're interested in reading of what those are, go Check his article out. We'll link it up in the show notes. I think it's a useful exercise, talking about what we're seeing, what we're, what we're paying attention to and, you know, sharing, sharing our thoughts on that. So I think that's gonna wrap it up for episode 460 of the Malooly asset podcast. Thanks, as always, for listening. We'll be back with you next week.
Speaker 3:Tom Malooly is an investment advisor representative with Malooly asset management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Malooly asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Malooly asset management may maintain positions in securities discussed in this podcast.