Warren Buffett’s favorite metric suggests some serious pain awaits investors / Market Watch
As an investor, staying informed about the trending news and information that will influence the stock market is essential.
Financial markets are dynamic and constantly changing, and keeping up with what is dictating the daily, weekly, and monthly swings in stock prices can be the difference between success and failure.
There is so much going on in the financial world it can be easy for investors to loose sight of what’s really important. That’s why we’ve condensed the most important news items and industry trends thats are influencing financial markets to 5 critical “must knows” for investors today.
1.) Buffet Forecasts a Downturn (We just don’t know how bad it will be)
During Berkshire Hathaway’s annual meeting, Warren Buffett predicted a decline in earnings for the majority of the company’s businesses, indicating an upcoming struggle to the broader economy. Berkshire’s portfolio of companies has broad exposure to the U.S. market, and is often seen as a bell-whether to how healthy the overall economy is. When Berkshire begins to struggle, can be a warning sign further economic pain is about to be felt.
Although first-quarter earnings generally support Buffett’s prediction of a downturn, the more recent results have been better than anticipated. According to FactSet, S&P 500 companies are experiencing their strongest earnings season relative to analysts’ expectations since the end of 2021. However, this doesn’t necessarily mean that Buffet is wrong, just that the economy (and inflation) remains more resilient than most originally expected.
2.) Musk Steps Down as Twitter CEO
Billionaire entrepreneur Elon Musk has announced that he has selected a new CEO for Twitter and its parent company X, who is expected to assume the role in approximately six weeks. The news has had a positive effect on Tesla’s share price, as investors have been concerned about Musk’s ability to manage the electric vehicle company after his acquisition of the social media platform.
Musk shared the news on Twitter, announcing Linda Yaccarino, the head of advertising at NBCUniversal, will be the new commander and chief of the struggling social media firm. Musk himself will remain as executive chair and chief technology officer at Twitter, with responsibilities for overseeing product, software, and system operations.
Yaccarino is recognized for her strong relationships with advertisers and ad agencies and is responsible for managing roughly $13 billion in annual ad revenue at NBC.
Since acquiring Twitter for $44 billion in October, Musk has faced challenges from users and advertisers regarding changes to rules, as well as concerns over mass job cuts. He has also made significant changes to user verification, charging $8 per month for a verified check mark. Some celebrities and organizations have reportedly retained their badges without paying.
As well, Musk has relocated Twitter’s headquarters from Delaware to his Nevada-based X Corp. His ultimate goal is to create an “everything app” called X, as he explained in a recent interview with the BBC.
3.) Lawmakers are Wrestling with Debt Limit Ahead of Meeting
Janet Yellen, the Treasury Secretary, warned that Congress needs to raise the debt ceiling in the coming weeks to avoid an economic catastrophe, stating that there are no other viable options available. President Joe Biden is set to meet with congressional leaders to discuss the crisis, with the expectation that he will support the bipartisan spending negotiations, while also calling for the debt limit to be raised without any conditions.
43 Republican senators, including Minority Leader Mitch McConnell, stated that they won’t support raising the limit without “substantive spending and budget reforms,” making a clean debt-ceiling lift less likely since it would need 60 votes in the 100-member chamber. While some constitutional scholars have suggested using the 14th Amendment of the Constitution to justify continued debt issuance, Yellen warned that doing so could result in a constitutional crisis.
The Biden administration is currently exploring a short-term extension through Sept. 30, but House Minority Leader Hakeem Jeffries expressed skepticism, stating that negotiating right now should be the main focus.
4.) Analysts Identify Which Jobs Could Be Most Affected by AI Chatbots
As generative artificial intelligence chatbots continue to rise in popularity, companies like IBM and Chegg are preparing for the impact on their operations. IBM is halting hiring in areas where AI may replace human workers, while Chegg’s share price has fallen by nearly 60% this year due to warnings of slower growth based off students preferring to use ChatGPT over their own platform.
A recent analysis by professors from Princeton University, the University of Pennsylvania, and New York University identified telemarketers, loan officers, law clerks, sociologists, political scientists, arbitrators, and mental health counselors as the most vulnerable to AI’s impact.
Due to AI’s image-generation skills, interior designers, architects, chemical engineers, and art directors are also at risk. However, it should be noted that the researchers admitted they don’t know how fast AI adoption will enter the economy and if it will truly be able to replace human beings in the industries listed above.
A recent survey by business service platform Tidio found that 64% of respondents believe chatbots, robots, or AI can replace teachers (and other professions) in the future, but many believe that qualities like empathy and good listening skills may be difficult to substitute.
5.) Powell Hints Fed Might Be Nearly Done with Current Hikes
Following the unanimous decision by Federal Reserve members to raise the bank’s benchmark interest rate by a quarter percentage point, Fed Chairman Jerome Powell hinted that they might halt any further increases, depending on incoming data.
Powell stated, “it’s possible that this time really is different”, hinting that raising rates continuously may not lead to a painful recession this time. History would suggest otherwise, however all we can do now is wait and see.
The Fed has increased rates by a total of five percentage points since March 2022, which is the quickest rate of increase since the 1980s. Powell acknowledged that the current unemployment rate of 3.5% is lower than it was a year ago.
This decision resulted in the fed-funds rate reaching 5.0% to 5.25%, the highest since autumn 2007. The Wall Street Journal reported that Fed officials would need to see data pointing towards stronger-than-anticipated growth, hiring, and inflation to consider raising rates again. The central bank’s next monetary policy meeting is set to take place on June 13-14, which should give the central bank plenty of time to digest incoming inflation data.
Stock futures reacted positively to the news, with the bulk of the rate rises now in the rearview mirror. Additionally, the fallout in the banking sector seems to be contained to a few regional banks (for now). However, the extent of the risk in the financial industry is still relatively unknown.
The Fed’s statement indicated that it believes it can continue its battle against inflation despite concerns regarding the banking system’s stability. Officials mentioned that the US banking system is “sound and resilient” and that it is too early to determine how much a potential lending pullback could impact the economy and inflation.
The central bank also removed the reference to “additional policy firming” in the future to achieve the annual inflation rate down to the bank’s 2% target. The Fed is also continuing to sell Treasury and mortgage-backed securities holdings, as they work towards reducing its multi-trillion-dollar balance sheet.
Other Good to Know Information
Market movements (so far) show that investors are cautiously optimistic about economic activity staying healthy while inflation will continue to showcase a downward trend. This, combined with lower oil prices and the Dow Jones Industrial Average showing surprising resilience amidst a tough earnings season (with respectable top-line revenue being reported from most companies) shows markets believe the unlikely scenario of a soft landing is still on the table.
That said, the Fed has expressed no sign of cutting interest rates in 2023, which is something investors have yet to price into today’s market. Overall, companies’ profits and revenues are holding well. However, the outlook from here remains cloudy.
Final Thoughts
In short, the broader market action shows cautious optimism amongst most investors.
The problems that have plagued financial markets through 2022 are still very much present today, however there is some good news in terms of interest rate hikes nearing an end and companies continuing to report decent earnings reports. That said, there is still too much uncertainty regarding the health of the economy and the banking sector to justify becoming too bullish.
Investors should ensure they are positioned correctly for the all but guaranteed high volatility that will enter financial markets as we begin the second half of the year. There are sure to be some whipsaws in both directions as interest rate hikes, inflation, and a resilient job market continue to work their way through the economy.