2022 was a year of extreme volatility for both stocks and bonds, and while things have quieted down a bit this year, volatility in the US Treasury market remains extremely elevated.  The top chart below shows the average daily percentage move in the SPDR S&P 500 ETF (SPY) and the iShares 20+ Year US Treasury ETF (TLT) over a rolling 200-trading day period.  Heading into 2022, volatility in both asset classes was very low after spiking to extremes in the early days of COVID, but once the Fed started to hint that it was starting to “think about thinking about” hiking rates, all hell broke loose.  While the average daily change in SPY over a rolling 200-day period never exceeded its peak from the COVID crash, volatility in long-term US treasuries, as proxied by TLT, rose above +/-1% to its highest level since the first half of 2012. When treasuries are swinging up and down (mostly down) 1% on a daily basis, that’s a very volatile environment!

While average daily swings in both stocks and bonds have declined this year, volatility has been much slower to subside in the treasury market than in the stock market.  The second chart below shows the spread between the average daily percentage move in both ETFs (TLT minus SPY), and as of last Friday, the spread rose to 0.237%, which outside of ten trading days in August 2015, is the widest gap between the two ETFs since TLT was first launched in 2003. Elevated volatility in bonds usually accompanies volatility in stocks, but the current degree of volatility in the bond market relative to stocks is rarely this high.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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On This Day in History:

Science & Space

NASA’s first asteroid-return sample is a goldmine of life-sustaining materials (Popular Science)
NASA’s OSIRIS-Rex mission returned samples from the asteroid Bennu, providing valuable insights into the early solar system and the origin of life-supporting water on Earth. The samples contain an abundance of water, carbon, and organic compounds. The sample also contains water-bearing clay with a fibrous structure, believed to be essential in delivering water to Earth billions of years ago. The results represent a significant scientific discovery and pave the way for further detailed studies. [Link]

How eclipses have shaped history (BBC)
In both fiction and real history, eclipses have occurred at crucial moments to influence decision-making, battles, and our very understanding of the world. Lunar eclipses especially have had profound effects, as they’re more widely visible than solar eclipses. In recent history, the eclipse of 1919 confirmed Albert Einstein’s theory of general relativity, a major turning point in the history of science and our understanding of the universe. Read on to learn about the eclipses that influenced the battle between the Lydians and Medes, Christopher Columbus, Tecumseh, and others. [Link]

Technology & AI

The race is on for tech’s ‘golden goose’ — the iPhone of the AI era (MSN)
Tech companies are exploring the development of AI-powered personal devices that could revolutionize human-computer interactions. Meta’s smart glasses that integrate Meta AI for real-time information and Humane’s AI pin that offers a novel way to interact with technology are just a couple of examples. Apple’s former design chief, Jony Ive, and OpenAI CEO Sam Altman are rumored to be working on a dedicated AI hardware device with a new form factor. While some believe AI-powered personal devices could replace smartphones, others are skeptical. [Link]

Admissions offices turn to AI for application reviews (Inside Higher Ed)
50% of higher education admissions offices use AI in their review process, with an additional 7% planning to adopt it by the end of the year. Admissions professionals are primarily using AI for reviewing transcripts, recommendation letters, and essays (and even using the technology to detect AI written essays!). While some remain concerned with the ethical issues surrounding AI in admissions, many have come to recognize the benefits and are increasingly incorporating AI tools into their work. [Link]

Big Tech Struggles to Turn AI Hype Into Profits (WSJ)
Tech companies are investing in generative AI tools, but those investments are yet to prove they generate profits. Microsoft, for example, lost money on GitHub Copilot, despite its popularity amongst coders. The high operating costs associated with AI are due to the infrastructure needed to run the large models. Microsoft, Google, and others are introducing higher-priced AI versions of their software in an attempt to offset costs, but again, profitability remains elusive. [Link]

Economic Trends

Meatpacking Plant Closures Cut Deep for Small-Town Economies (WSJ)
Tyson Foods’ decision to close its chicken processing plant in Noel, Missouri, is causing economic turmoil in the town and nearby communities. While not all in the community were directly affected, businesses like Tony’s Burritos, run by a family across the street from the plant, have seen sales plummet. Tyson’s plant closures are part of a broader trend in the meatpacking industry, driven by declining consumer demand and high costs for livestock, feed, and wages. The closures have significant economic implications, leading to job losses, reduced tax revenue, and challenges for local businesses and farmers who depend on these plants. [Link]

2″ x 4″ Wood Mailed in Protest to Paul Volcker (Museum of American Finance)
Paul Volcker served as the Fed Chairman from 1979 to 1987, and he implemented policies to combat the high inflation and slow economic growth of the period by raising interest rates. Many of his actions faced strong criticism, especially from the agricultural and construction sectors. The 2″x4″ mailed to him in protest of his policies symbolized the downturn in the housing market. The 2″x4″, many protested, was useless if nobody could buy a house. [Link]

Ship Freight Rates Tumble as U.S. Consumers Buy Fewer Goods (WSJ)
Container shipping rates have dropped dramatically, down as much as 90% from early 2022, affecting ocean freight haulers and leading to mass sailing cancellations, vessel mothballing, and reduced container capacity. Many shipping companies have been preparing for tougher times after the COVID-19 pandemic caused a huge boom in business. U.S. consumer confidence has also dropped, and some retailers are negotiating to lower prices agreed to under long-term freight contracts. With fleet capacity increasing and container trade demand falling, shipping companies are reviewing capacity management to adapt to the market conditions. [Link]

Spending Down Pandemic Savings Is an “Only-in-the-U.S.” Phenomenon – Liberty Street Economics (Liberty Street Economics)
During the COVID-19 pandemic, people in high-income countries, including the United States, significantly increased their savings due to reduced spending and government financial support. A divergence in saving habits has emerged though. In the U.S., the saving rate has fallen below pre-pandemic levels, leading to consumers using their accumulated savings to boost economic activity. In contrast, other high-income countries have maintained higher saving rates, resulting in slower economic growth. The reasons for this difference in saving behavior are not entirely clear, but they may relate to variations in the sources of excess savings and consumer confidence. [Link]

US auto salvage industry braced for impending bounty of junk EVs (Financial Times)
As the number of EVs on the road increases, salvage yards are considering how to recycle their batteries and other components once they reach the end of their lives. EVs have fewer moving parts and, generally speaking, experience less wear and tear than other cars, making them much different from the perspective of salvage businesses. EV parts are of much higher value, but it also takes more time and raises costs to take them apart. For these reasons, salvage companies are exploring partnerships to recycle batteries and learn as much as they can to keep their businesses headed in the right direction. [Link]

How disadvantage became deadly in America (Financial Times)
Life expectancy in the United States shows shocking disparities, with the most disadvantaged Americans having significantly shorter lives than their counterparts in other developed countries. While economic explanations might seem plausible, evidence suggests that it is not solely due to income inequality or material well-being. Instead, it is the causes of early deaths that reveal the stark differences. In the US, younger individuals often die from drug overdoses or gunshot wounds by age 40, whereas in other wealthy nations, it is more common for people to die from cancer before the age of 60. Perhaps this research points to a glaring issue in opioid use and predatory pharmaceutical practices that don’t occur in other wealthy nations. [Link]

Crime & Consequences

Home Depot Tracked a Crime Ring and Found an Unusual Suspect (WSJ)
A Florida pastor, Robert Dell, who ran a drug recovery program was found to be running an organized retail-crime ring on the side, acting as a middleman buying stolen goods and reselling them. In doing so, he has amassed $3 million in sales since 2016. Dell and four others were arrested and charged with racketeering, conspiracy to commit racketeering, and dealing in stolen property. Retailers, faced with increasing thefts, are investing more in their retail-crime investigations and collaborating with law enforcement and resale platforms to combat these issues. For reference, retail theft, known as “shrink,” accounted for $112.1 billion in losses in 2022. [Link]

A Detective Sabotaged His Own Cases Because He Didn’t Like the Prosecutor. The Police Department Did Nothing to Stop Him. (ProPublica)
St. Louis Circuit Attorney Kim Gardner’s progressive approach to criminal justice introduced an “exclusion list” to address concerns about police misconduct, preventing officers with credibility issues from testifying in cases. The list included Detective Roger Murphey, who had posted contentious content on social media. When Garnder’s office gave the green light for him to testify in certain cases, though, Detective Roger Murphey refused on the grounds that Garnder had already impugned his character which would give defense lawyers grounds to raise doubt about his credibility. As a result of Murphey not testifying, some defendants walked free while others received more lenient sentences. [Link]

Quiet Philanthropy

Charles Feeney, Who Made a Fortune and Then Gave It Away, Dies at 92 (WSJ)
Charles Feeney, a billionaire who co-founded Duty Free Shoppers and gave away nearly all of his fortune to various causes, passed away at the age of 92. He was known for his secretive and anonymous philanthropy, avoiding public recognition, and contributing to diverse projects around the world, from medical facilities to universities. Feeney’s commitment to giving away his wealth, and the fact that he achieved it while still alive, made him an exemplar of philanthropy for many others. [Link]

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Have a great weekend!

Is the economy falling off a cliff, headed for a slow landing, or just getting ready to take off is a question that every investor is looking for an answer to these days, and when it comes to gauging the health of the economy, the first direction investors turn is towards macro data from various government agencies and other trade groups.  These are always helpful, but they’re usually backward-looking and prone to revisions.  Since the macro backdrop is made up of millions of micro inputs, we find that it’s helpful to go right to the source and listen to and read through earnings season conference calls of individual companies.

Throughout earnings season, we listen to and read through the conference call transcripts of individual companies reporting.  We then publish summaries of the key calls and cover the main micro and macro trends discussed on each call.  With conference calls lasting an hour or more, these one- or two-page summaries which take just a few minutes to read are a great time-saver for investors. To view our latest Conference Call Recaps or learn how to get access, check out our latest summaries.

It’s in a company’s best interest to present themselves in the best possible light during each quarter’s call, so you’ll often hear company executives look to spin whatever is going on with their businesses in the best light possible. Getting the true picture of how a company’s business is operating requires investors to look past some of the jargon, but companies don’t have nearly as much incentive to put “lipstick” on their view of the overall US economy.  If anything, it’s in their interest to downplay any economic strength because it would either justify whatever lackluster results they report or make their good results look even better.

The pace of earnings season doesn’t pick up in earnest for another couple of weeks, but we’ve already started to see some results from key companies in various sectors, and based on the macro-related commentary within their recent calls, the economic picture they draw is that while the economy hasn’t been particularly strong in recent months, it has been stable with a bifurcation between higher and lower-income consumers.  A couple of trends that stand out on recent calls are that consumers remain confident about their employment, and wage growth has been steady.  That sounds great, but those higher wages translate to higher costs, which companies say are starting to become more entrenched. Below we provide some snippets of various macro-related commentary from recent calls, and one topic that was notably absent (mostly) was a discussion of supply chain issues.  Based on the commentary of companies reporting so far, whatever supply chain issues that were persisting have largely been resolved.

Autozone (AZO)
• “We haven’t seen to this point, sort of a wobble from the consumer. We think it’s been a two-speed world for a while where the low-end consumer has been under some pressure, but consumers that have higher incomes have been doing well.”

Citigroup (C)
• The growth in spending is decelerating, and the consumer is more mindful what they spend on.”

Conagra Brands (CAG)
• “After three years of unprecedented inflation, along with other macro dynamics, consumers have felt increased financial pressure and used a variety of strategies to stretch their balance sheets. This resulted in a near-term reprioritization of their typical purchase behaviors.”

Dave & Buster’s (PLAY)
• “[Consumers] are spending at consistent levels of what we historically have seen in that post-COVID environment.”

Delta (DAL)
• “We are seeing the structural step up in operating costs.”

JP Morgan (JPM)
• “Currently, U.S. consumers and businesses generally remain healthy, although, consumers are spending down their excess cash buffers. However, persistently tight labor markets as well as extremely high government debt levels with the largest peacetime fiscal deficits ever are increasing the risks that inflation remains elevated and that interest rates rise further from here.”

Lamb Weston (LW)
• “In the US, overall restaurant traffic was flat versus the prior-year quarter as QSR traffic growth offset further traffic declines in full-service restaurant channels.”

Lennar (LEN)
• “Two years of 500,000 apartment starts per year are now being delivered and creating supply increases and, in some geographies, excess supply, which are moderating rental rates.”

MillerKnoll (MLKN)
• “We’re still in the early period of recovery, and our business segments reflect varied economic conditions around the globe. Right now, we have cause for both enthusiasm and vigilance.”

Nike (NKE)
• “We continue to see consumer demand for our brands and for our products to be very, very strong. Sport is growing and the consumer is proving to be resilient.”

PepsiCo (PEP)
• “The things that I usually look at with the consumer to detect whether there is high stress, we see good results in.”

While CPI was the main focus of the morning’s economic data, jobless claims were the other major release of the morning. Last week’s reading on seasonally adjusted initial claims was revised up by 2K to 209K and this week’s reading was unchanged from that level.   That was slightly below forecasts which were calling for claims to rise further to 210K.  Overall, claims have seen a rebound in the past few weeks, but that is still well below the range of readings from earlier this year.

Being the fourth quarter, seasonal tailwinds will shift to headwinds over the next few months. Prior to seasonal adjustments, initial claims saw a sizeable 22.8K week-over-week jump.  Claims rising in the current week of the year is very normal as it has occurred 85.7% of the time historically.  Given that increase, that would confirm last week as the likely annual low in unadjusted claims (at least for the time being). As we noted last week, that is a bit later than normal, but not exactly without precedence.

Relative to initial claims, continuing jobless claims have maintained a more consistent trend over the past several months. This year has seen continuing claims consistently grind lower, but that trend is not as strong as it once was as claims have appeared to round out a bottom.  Continuing claims topped 1.7 million this week. That is the highest reading since the week of August 19th and was well ahead of expectations of 1.675 million.  While claims are by no means weak (outside of the few years prior to the pandemic, current readings remain around some of the lowest since the early 1970s), both initial and continuing claims have seen modest deterioration recently.

The S&P 500 has been in rebound mode over the past week, having now rallied 3.45% off the October 3rd low.  In turn, sentiment has taken a distinguished bullish turn to start out the month of October. That compares to last month when sentiment took a more bearish tone as we discussed in Tuesday’s Closer. On top of a 2.2 percentage point increase in bullish sentiment last week, this week saw the percentage of respondents to the AAII survey climb another 9.9 percentage points. That brings bulls up to 40%, the highest since the first week of September, and back above the historical average (37.5%).

Bearish sentiment saw a corresponding pivot lower. Bears are now down to 36.5% versus the recent high of 41.6% last week. While that is only the lowest level since the week of September 21st, it was the largest week-over-week drop since June 8th. Additionally, that decline has not been enough to bring bearish sentiment back to normal levels as it is still 5.43 percentage points above the historical average.

That has resulted in the bull-bear spread tipping back into positive territory for the first time in a month.

Of course, the drop in bearish sentiment was not nearly as large as the increase in bullish sentiment. That was because there was a notable decline in neutral sentiment. That share of respondents reporting that they expect unchanged prices fell by 4.8 percentage points this week.  Not only was that the fourth week-over-week decline in a row, but it was also the biggest one-week decline since July.  Now at 23.5%, neutral sentiment registered its smallest share in just under one year.