Last week I heard a nicely pithy take on what drives American technology stocks these days. “The NASDAQ now moves with Jay Powell’s comments,” said my contact. Quite so. A speech by the Federal Reserve boss on Wednesday was widely regarded as doveish. The result? Bond yields fell sharply; and the tech-heavy NASDAQ index was up by 4.4% by the day’s close.
The conversation was part of my research for a piece in which we sort America Inc’s winners and losers in this business cycle by stockmarket performance. The daily movements in a company’s share price are influenced more by investor fads or shifts in discount rates than by the performance of the underlying business. Over time, though, business success is embedded in market prices. The fundamentals will out, eventually.
So who has thrived and who has dived? Inflation-proofness is a key theme. Among the sectors that beat the overall S&P 500 index of large American firms were asset-heavy industries, such as energy and materials, which do well in an inflationary environment. Industrials—think Caterpillar, a maker of mechanical diggers—have kept pace with the overall index. But companies that serve discretionary parts of consumer spending, which is squeezed by inflation, mostly suffered. Amazon was one of the losers. Communication services, a category that includes Meta, the parent company of Facebook, was a big laggard.
There is a strong flavour, here, of the old economy trouncing the new one. Does it now mean a capital-heavy business model is the key to success? Not really. For a start, the information-technology category of the S&P 500 is the next-best performer after energy. A lot of tech firms, including Apple and Nvidia, a chipmaker, have done very well. What is more, the techy businesses that have performed badly of late have done so in part because they need quite a lot of capital to keep going. Netflix needs to spend heavily on new content to sustain its competitive position.
Meta has blown a fortune in an attempt to establish itself as a virtual-reality platform. And Amazon’s capital budget next year is more than twice that of ExxonMobil, an energy supermajor.
This is quite a turnaround. It is big oil, and not big tech, which has a reputation for blowing profits on capital spending. But the influence of ESG (environmental, social and governance) investing has acted like a capacity-limiting cartel on the fossil-fuel industry. Or as my analyst friend puts it: “ESG is the new OPEC.”
Fast fact: Shares of Tesla, the electric-car maker run by Elon Musk, soared in value nearly 15-fold from January 2020 to November 2021. Since that peak they have fallen by half, but are still up 600%.
Your preview of next week
Monday December 5th: An EU ban on seaborne imports of Russian crude oil comes into force. EU-flagged tankers will also be prohibited from transporting the cargo. Russian oil exports have leapt ahead of the ban as countries around the world boost supplies. The International Energy Agency, an official forecaster, reckons that Russian output will fall by 14% because of the sanctions, a big hit to Russia’s oil revenues. OPEC holds a meeting on December 4th, just before the ban comes into force. Saudi Arabia is busily denying reports that the cartel is about to reverse course and increase production.
Tuesday December 6th: Australia’s central bank meets to decide whether to lift interest rates again. It has raised the benchmark rate for seven consecutive months, taking it to 2.85%, but the minutes of the previous meeting removed language about further increases being “likely”, signalling that the bank is considering a pause to tightening. The central banks of Canada and India make their rate decisions on Wednesday. Barnes & Noble Education, one of America’s biggest chains of college bookstores, reports earnings. Spun out of Barnes & Noble in 2015, BNED has seen sales gradually improve since the pandemic, when campuses were locked down. America’s balance of trade
for October will show whether the deficit in goods has widened again. The deficit had been narrowing for five straight months until September but the strong dollar has hit exports. China reports its trade data the next day.
Wednesday December 7th: The online clothing-rental business is expected to grow considerably over the next decade, as more fashionistas turn away from buying clothes for environmental reasons, including in large markets such as Brazil, China and India. But is it profitable? Rent the Runway, an industry leader, will hint at an answer when it reports earnings. Revenue is up this year, but the company’s costs, including “product depreciation” (ie, wear and tear), are huge. And its web traffic has slowed recently. This year RTR’s share price has skidded faster than a Louboutin Pigalle on ice.
Thursday December 8th: Broadcom may provide an update on its takeover of VMware when it reports earnings. At $61bn, the second-biggest deal of the year is facing intense scrutiny. Britain’s competition regulator is considering whether to open a formal investigation. On December 20th the European Commission is expected to say whether it will proceed with its own inquiry. America’s Federal Trade Commission has begun a deeper, second-stage review of the deal. Disney will hope that the launch of an ad-supported version of its Disney+ streaming service will provide some positive news after the defenestration of Bob Chapek as CEO. The cheaper subscription plan is only available in America, for now.
Friday December 9th: China releases its consumer-price index for November. Inflation has been subdued in China as domestic demand waned amid stringent lockdowns. Russia and Argentina also release inflation data. In Russia the annual rate fell to 12.6% in October; the mobilisation of men to fight in Ukraine suppressed consumer spending. Despite a government price freeze on hundreds of goods, inflation in Argentina is expected to soar past October’s figure of 88%. Argentina now has the highest inflation rate in the G20, exceeding even the rate in Turkey.
“Kingdom of Dreams” based on the book by Dana Thomas (“Deluxe: How Luxury Lost its Lustre”) and streaming in America and Britain. If you ever wonder what is the point of the luxury-fashion industry (market value $700bn) with its inherent frivolity and drama, this documentary will shed light on the motives of the big players. The rivalry between Bernard Arnault (“the wolf in cashmere”) and François-Henri Pinault, and the conglomerates they lead—LVMH and Kering—forms the backbone of this compelling narrative.
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