This post was originally posted on TKer.com.
Consumer behavior is incredibly complex and nuanced.
Over the past year, we have learned that consumer spending may rise even as consumer confidence plummets amid high inflation and a growing risk of recession.
One category that has seen a particularly high level of inflation is travel, with airfares up 28% from a year ago. Yet one of the largest sectors of consumer spending has been vacation travel, which, by the way, is considered discretionary spending.
As for discretionary spending, analysts at Bank of America recently found “Consumers don’t necessarily dine out less during downturns, but instead tend to gravitate towards cheaper restaurants.”
This 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 quarterly earnings call on July 27, CEO Tom Werner drew attention to the “fries attachment rate” (via The Motley Fool):
Despite pressure on overall restaurant traffic, demand for fries remains strong as the U.S. fries attachment rate, which is a rate at which consumers order fries when visiting a restaurant or other outlets restoration, remains above pre-pandemic levels.
In other words, when people go out to eat, they don’t allow their deteriorated feelings about the economy to influence their decision to order fries.
Here are some more colors from CFO Bernadette Madarieta:
Overall, we expect US demand to remain strong, but will also likely be affected by the significant inflation that consumers are facing. In the event of an economic downturn, we expect French fries demand to be resilient, albeit with little to no growth. This matches what we experienced during the Great Recession of 2008-2010.
Although the worst economic crisis since the Great Depression may have stunted growth, it wasn’t enough to get people to stop ordering fries.
In case you missed it
🙋🏻 ♂️ Many of you have become new subscribers in recent months. (Welcome!) Some of you did not have time to open all the newsletters. (We’re all busy!) Some of you are free subscribers looking for a reason to become a paid subscriber.
For all, here is a roundup of some of TKer’s most talked about paid and free newsletters. All titles are hyperlinked to archived pieces.
700+ reasons why S&P 500 index investing isn’t very “passive”💡
Passive investing is a concept commonly associated with buying and holding a fund that tracks an index. And no passive investment strategy has garnered more attention than buying an S&P 500 index fund. However, the S&P 500 – an index of 500 of America’s largest companies – is anything but a static lot of 500 shares. From January 1995 to April 2022, 728 tickers were added to the S&P 500, while 724 were removed.
“Past performance does not guarantee future results,” said 📊
The S&P Dow Jones Indices have found that funds that beat their benchmark in one year are rarely able to continue to outperform 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 prolong this sequence of outperformance. in 2021.
Stock market sales that make your stomach turn are normal🎢
Investors should always be mentally prepared for big sell-offs in the stock market. That’s part of the deal when investing in an asset class sensitive to the constant flow of good and bad news. Since 1950, the S&P has experienced an average annual maximum decline (i.e. the largest intra-annual sell-off) of 14%.
Goldman Sachs busts one of the most enduring myths about stock investing 🤯
“While valuations are an important part of our toolbox for estimating future stock returns, we should dispel the oft-repeated myth that stock valuations are mean reverting,” Goldman Sachs analysts said. “…there is only 26% confidence that Shiller’s CAPE is mean-reverting, and 74% confidence that it is not.”
Beware of Contextless and Gloomy Headlines in Jobs Reports 👎
The media sometimes unfairly characterize new data when trying to capture the attention of their audience. The November 2021 jobs report came with plenty of mainstream headlines suggesting the creation of 210,000 jobs was a bad thing. Nine months later, we learn that the labor market boom continues uninterrupted.
A statistic shows how hard it is to pick stocks that beat the market 🎲
Picking stocks with the goal of beating market averages is an incredibly difficult and sometimes expensive endeavor. In fact, most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks do not offer above average returns. According to the S&P Dow Jones indices, only 22% of S&P 500 stocks have outperformed the index itself from 2000 to 2020. During this measurement period, the S&P 500 has gained 322% while the median stock has risen only 63%.
What Meta’s $251 Billion Rout Teaches About Investing 🧐
After posting disappointing quarterly results in February, Meta shares plunged 26% in a single trading day. After losing a market capitalization of $251 billion, the social media company quickly fell from the sixth largest company in the S&P 500 to the seventh. It’s the kind of move that could have shaken the confidence of investors and traders with positions in other stocks. And it did: on the same day, the S&P 500 fell 2.4%. But losing 2.4% is not far from losing 26%. It is diversification at work.
Wall Street’s 2022 outlook for stocks 🔭
Released on Dec. 5, this newsletter showed that Wall Street strategists predicted the S&P 500 would end 2022 between 4,400 and 5,300. The market is currently trading below the most bearish strategist’s target. Who knows? Perhaps the market will rise in the last months of this year. That said, I think this excerpt from that newsletter was remarkable:
⚠️ It’s incredibly difficult to accurately predict where the stock market will be in a year from now. In addition to the countless variables to consider, there are also the totally unpredictable developments that occur along the way. Strategists often revise their goals as new information comes in. In fact, some of the numbers you see above represent revisions to forecasts. a year. Still, it can be fun to track these goals. This helps you get an idea of how high or low different companies on Wall Street are going.
A trillion dollar exhibit 💰
Five stocks (Facebook, Apple, Amazon, Microsoft and Google) make up a massive share of the market capitalization of the S&P 500, which is made up of 500 companies. While it may be technically accurate to say that these five stocks represent five companies, this is also an oversimplification of the businesses and markets to which these companies are exposed.
Peter Lynch made a remarkably prescient observation of the market in 1994 🎯
Peter Lynch, the legendary stock picker who ran Fidelity’s Magellan fund for 13 years, made a prescient observation in a speech he gave to the National Press Club on October 7, 1994: “An event will come out of the field left, and the market will go down, or the market will go up. Volatility will occur. The markets will continue to have these ups and downs. …Core corporate profits have grown about 8% a year historically. Thus, corporate profits double approximately every nine years. The stock market is expected to double approximately every nine years…Because profits are growing at 8% per year, and stocks will follow. That’s all we can say about it.”
10 truths about the stock market 📈
The stock market can be a daunting place: it’s real money at stake, there’s an overwhelming amount of information, and people have lost fortunes there very quickly. But it is also a place where thoughtful investors have accumulated a lot of wealth for a long time. The main difference between these two perspectives has to do with the misconceptions about the stock market that can cause people to make poor investment decisions.
This post was originally posted on TKer.com.
Sam Ro is the founder of Tk.co. Follow him on Twitter at @SamRo.
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