Ep 11: Stock Market Update | Earnings, Fitch Downgrade and Swiftenomics

Jess: Welcome back, Money Coven. You're listening to Market MakeHer, the self-directed investing education podcast breaking down complex stock market topics from her perspective. We're your host. I'm Jessica Inskip, the resident finance expert, CNBC regular, and had the coolest career milestone this past week as I was a guest on Mad Money with the infamous Jim Cramer.

Jessie: Please tell the coven if you press the buttons.

Jess: Oh, at least seven. There's a video out there and- Jim is incredibly kind for having me. So great to work with was awesome. It was like a kid at Disneyland. Or seeing Taylor Swift for the first time.

Jessie: And I'm Jessi DeNuit, the beginning investor here on the learning and earning journey with you, asking all the clarifying questions and steering us far away from financial jargon land. And today we're unraveling the mysteries of what's happening in the economy with another stock market update ritual. Where we'll break down the past and read the tea leaves to prepare you better for navigating the market and hopefully conjure up some profits.

Jess: Definitely owed you that. Left a blank space. This is your August stock market update.

Jessie: So Jess, what is this lower credit rating of our country that I'm hearing about?

Jess: Fitch downgraded our sovereign debt.

Jessie: Two questions. Who is Fitch and what is a sovereign debt? Fitch is a credit rating agency like S&P 500 or CFRA. There's all these agencies that rate debt securities, kind of like what we talked about on the preferred stocks episode. If you're issuing debt, you get that credit score that's triple A, so AAA, you get an A plus or a B, a combination of that, and Fitch. is assigning that grade.

Jessie: It's not just companies that have these credit scores, like countries have them too.

Jess: That's right. And the sovereign is our country. I was thinking of it like Queen Elizabeth's, the sovereign.

Jessie: Oh right, yes.

Jess: And that's our treasuries and debt securities that's issued by the US government. You know how we talked about indexes or indices? They're like this elite club with requirements. And if you don't meet those requirements, you're kicked out. If you're kicked out, that means you're sold. out of the index. And if there's a lot of selling, it makes things go down. The market is a function of supply and demand. If there's more buyers, then sellers, it will go up. If there's more sellers than buyers, it will go down. There are some indices or indexes or even portfolios that have those elite requirements for debt within that methodology. And so the fear was if there was a downgrade, there would be forced selling. But since 2011 and since March of 2023 when they had the debt ceiling standoff, there was actually some changes put in place to prevent that, which is why I think the market just kind of shrugged it off and said, cool, whatever, we just care about earnings.

Jessie: The market feels the same way we all feel about aliens right now, is what you're saying. Jess: Basically, yeah.

Jessie: That's cool.

Jess: Give us something more. Yeah. They downgraded the US credit from a top AAA. AAA is the highest you can have. Triple B or higher is considered investment grade. They downgraded them one to AA plus. So S&P did that back in 2011 and it's actually still an AA plus. That same downgrade, they haven't re-upgraded it from what happened in 2011 that caused some turmoil in the markets. That rating is still there.

Jessie: I'm confused. The USA's sovereign debt has been an AA plus since 2011?

Jess: No. So just like your credit report, there are different agencies. You've got TransUnion, Equifax.

Jessie: Experian?

Jess: It's just like that. There are different rating agencies. There is Fitch, Moody's, and S&P. S&P downgraded the sovereign debt in 2011 from a triple A to a double A plus. And it stayed that way. Hasn't moved since 2011. The last time we had one of these debt ceiling standoff things. So Fitch has joined the S&P party. Moody's has still maintained their top rating of US credit.

Jessie: Okay. Like how you're going to have different credit scores depending on the credit? Bureau you're looking at. Why did Fitch just now decide to downgrade the US to the double A plus rating?

Jess: I think it's such an interesting statement. I'm going to read it. We're going to link it in the episode equity so you can read it too. They titled it erosion of governance.

Jessie: So dramatic.

Jess: They said in Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt. matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. This is the one, the dramatic statement. The repeated debt limit political standoffs and last minute resolutions have eroded confidence in fiscal. management. In addition, the government lacks a medium-term fiscal framework, unlike most peers and has a complex budgeting process that with economic shocks, tax cuts and new spending initiatives have contributed to successive debt increases over the last decade. So interesting. Two famous investors out there, Mr. Warren Buffett, the king himself, and Bill Ackman. Mr. Warren Buffett said, and I quote, there are some things people shouldn't worry about. This is one. Awesome.

Jessie: So he don't give AF.

Jess: He did not. He bought $10 billion worth of US Treasuries on Monday and did the same a week prior. He said the only question is if he'll buy 10 billion more in three-month or six-month Treasury notes.

Jessie: Wow.

Jess: Bill Ackman, on the other hand, shorted. He took the other end and he's a famous hedge fund manager. So it's standoff of two really wealthy investors.

Jessie: So it's like a bull versus bear type situation.

Jess: It is. Yeah. But Ackman gave some rationale. He said he feels that it's all about inflation. He thinks it's going to be higher now than the market even thinks, even though there's signs it's coming down within the data, like that it's going to come back like 1970s style. He talks about how there's higher defense costs, which is true. There is a big energy transition. That's expensive and de-globalization. And then this is the kicker, the greater bargaining power of workers.

Jessie: Oh,

Jess: you know, Warren Buffett's the greatest investor of all time.

Jessie: He's the only one I really ever heard about. Nothing can shock us anymore. There's aliens, no one cares. The US gets their downgrading to a double A plus. Market doesn't care.

Jess: You know, it makes sense though. Resilient consumer is the word that's used in the market constantly. You're right. Not much shakes that resilient selective consumer. The market's forward looking right now because the hot topic is inflation. If some piece of data comes in that would make the Fed raise interest rates more. that will hurt the consumer and so the market will go down.

Jessie: And are we seeing inflation coming down?

Jess: Oh, we are going to know next week. But yeah, we are going to know next week when CPI and PPI comes out.

Jessie: What's CPI and PPI?

Jess: So CPI is the consumer price index. This is the measures of inflation. And there's a lot of other economic events. So what you're looking at is an economic calendar, just like earnings is that report card of how a stock is doing, which we need to talk about everything centered around the consumer. How is the credit situation? How are small businesses doing? How are wholesale inventories? Are people? putting in mortgage applications and CPI is a really important one because that's what measures inflation. So the consumer price index, which is just like a mutual fund is a basket full of securities, this is a basket full of goods and services, meaning what your rent cost, your food, energy, cost for shelter, gassing up your car, services is travel and leisure. This is coming down and that's trending in the right direction.

Jessie: So that means our groceries are starting to come down a little bit. Our rent is hopefully going to be coming down. Right. So next week is the CPI numbers coming out. So if the number goes down lower, that means things are getting better.

Jess: You want inflation to be 2% year over year. We're at 3%. That's not bad. We're at 9%.

Jessie: Yeah.

Jess: That's so much better. There is a difference in CPI versus PPI. So CPI is consumer, that's people. PPI is producer prices.

Jessie: Businesses that are producing goods and services.

Jess: Right. Like think wholesalers.

Jessie: Oh, okay.

Jess: This one is coming down considerably.

Jessie: Does CPI and CPI normally kind of coincide together?

Jess: They're both trending down. It's just, is that being passed on?

Jessie: This helps inform us of... of how the stock market's performing?

Jess: It does. The big topic and the big macro headwind or issue is inflation. The Fed doesn't care what the stock market does. They care that inflation comes down. They have a 2% target goal. They want inflation at 2%. They'll do whatever it takes to get it there. And they want to do that without killing the consumer. But in order to get it to 2%, they have to get the consumer to stop spending. If you're willing to pay higher prices. Yeah. They will, but that stopped. And we saw that in earnings, and that's why you pay attention to earnings. So it's all just this incoming data, and that's really what's happening in the month of August. And the theme that we're probably gonna continuously talk about. We use CPI and PPI to see the actual numbers. CPI is from the consumer perspective, PPI is from the producer perspective. So you can utilize all of this data from different perspectives, because diverse perspectives is how you solve a problem. But Mr. Chair, Fed Powell is the one that's gonna say, I'm gonna raise interest rates. I am going to make the economy a little sicker because that will make them better in the long run.

Jessie: I see.

Jess: Like when you get a flu shot.

Jessie: Right. So the interest rates started raising in the first place as a response to things not recovering from COVID, like the economy.

Jess: That's right.

Jessie: Okay.

Jess: Super, super high inflation.

Jessie: So it was like COVID really hurt our economy, things like we're getting out of hand. So the Fed came in and was like, okay, we've got to start raising interest rates to try to balance this out somehow or get things back to normal. Yeah. Are pre-COVID normal?

Jess: So during COVID. They said, oh, inflation is transitory, was the word, meaning it was just gonna resolve itself because China was shut down. We get a lot of our stuff from China, if you can, then the cost to produce stuff. People that left the workforce didn't come back, so that created a tighter labor supply. So really, my personal opinion is that we have been in a record amount of low interest rates, and that caused growth too fast. if that makes sense. We should have never been at this low interest rate for this long.

Jessie: I see. So it's probably true that interest rates won't be low like that again for a long time. The mortgage, I always go back to mortgages, but they were so low, it was like 3% or something, and that's probably not going to happen.

Jess: It's possible.

Jessie: Unless something crazy happens.

Jess: Yeah, if something breaks, they'll absolutely cut interest rates. Or if they get inflation down to their target rate, they may cut it too. It's possible. The market projects a cut.

Jessie: Well, we should probably talk about earnings season.

Jess: Yeah. The market has been going up consistently because of this better than anticipated earnings. We're in earnings season and earnings season is your report card for your stock. It's your quarterly job review. You set goals with your employer. You had some expectations. You see if you met or exceeded those expectations, there is consistent data. We measure earnings by the S&P 500. How many of those 500 securities have reported? As of. today, August 4th, 422. So like, this is the end of it basically. Consumer discretionary is the one that is leading the way. 83% of the consumer discretionary stocks that have reported are above their earnings estimates. And that's a huge number.

Jessie: What does discretionary mean?

Jess: That's actually led by Amazon. Tesla is considered discretionary too, but discretionary is like clothing. It's things that you don't need, but you want, but definitely things.

Jessie: Are we talking about stocks?

Jess: Yep, anything that falls in that sector. When I'm looking at earnings, we would look at it like a funnel approach. So you're looking at your goals. It's, okay, how did your team do? Or your department? When you're looking at the 11 sectors, it's how did each team do in that department? And then if you look at each individual stock, it's how did each person do? Sometimes we'll go into the person. If there's like one person that carries the weight of the team, which is Apple and Microsoft, and Amazon…there's always that person that carries the weight, you know, gets you to your goals. Basically out of everything that's reported, 84% have reported earnings. So 422 of the 500, 79% have beat earnings. 79% have beat earnings.

Jessie: That's a lot, right?

Jess: That's so much.

Jessie: What do we call it? Consumer discretionary.

Jess: Consumer discretionary, yep. That led the way with 83% staples did at 88. So that's your Procter and Gamble, your toothpaste, stuff like that. Healthcare had the highest at 92% due to higher prices. That's a concern because that one was due to higher prices. The others were more for better operating efficiencies, automation and stuff like that, which is great. And then information technology always leads the way with a beat, 91%.

Jessie: Wow.

Jess: Crazy.

Jessie: Basically we have most of the numbers in for earnings season for this quarter. Things are surprisingly up, right? Despite all the other things going on with the economy. So what does that tell us about where we're going?

Jess: From an earnings perspective, they'll give us forward-looking guidance, positive revisions or negative revisions. Those come in constantly from analysts though. So are they going to continue to have better than anticipated earnings? Analyst recommendations, they move the market, meaning like Amazon had a record prime day. Analysts are going to adjust expectations and say, we expect them now to have higher earnings. Amazon will then go up in price. Then they report their earnings. They do better than that. They'll go up even more, which they did.

Jessie: Even though some of these stocks, the S&P 500, are surprisingly up higher than expected with inflation and everything, they're being projected in some cases to continue to go higher. Jess: Yes. And that's what you look for after earnings season is what's the expected growth of these companies.

Jessie: So do people, and I know we haven't really talked about strategy too much yet, but so these are the things you look at when you're considering whether it's a good time to buy. That means any ETFs that mirror the S&P 500 are also going to be a little more expensive to buy right now than they were six months ago, right?

Jess: They could be, but the way that we define expensive is not by dollar value. That's why we need the stock analysis episode. So when we do a stock analysis, we will define if something is expensive or not.

Jessie: Okay.

Jess: It's not by dollar value. It's like relative to everything else.

Jessie: Well, I was just thinking just because the market is looking good right now or up, it doesn't mean... that you've missed your time to buy or to invest. It's good that it's doing well. And if you haven't started investing yet, that wouldn't necessarily mean, oh, wait for it to come back down before you start investing. It's never necessarily a bad time to invest if you have the extra money to invest and you're ready to invest in the stock market. You wanna know all these things, you wanna know how it's performing, you wanna know how the economy and how the consumers affect everything, but it's still okay to invest. when things are up because we're doing it for the long term anyway. Things are up now, they go up and down all the time. You can always keep investing like each month, whatever money you're able to. And then maybe when things go down and if you have the extra money, you could always invest a little bit more because you know things like the S&P 500 go down but then they do come back up at some point, right?

Jess: Yeah. It's time in the market is much more important than the amount that you have invested. And that is something that her first 100K says and she says it right. And then I will stop talking.

Jessie: Yeah. Which are listeners take away from the market update?

Jess: It's a roller coaster and there are certain things that affect that roller coaster. If you just want to understand the mechanics of it, this is really important to know we're still missing the business cycle. That's, that's where. we would talk about where we are in the cycle and just certain sectors perform better. And that's where you do portfolio allocation. There's S&P 500 weighting recommendations where it'd say be overweight in tech, be overweight in consumer discretionary, be underweight here. And you could model that. So there's an analyst for everything. But if you want to know how things work and what moves the market or why it's going up so much, and in order to understand if something will perform better than something else. You have to understand all of this.

Jessie: Right. Okay.

Jess: We call that alpha. So beta is the benchmark. Alpha is outperforming it. Real girls know how to handle stocks. That's what I'm putting on our merch. That is the takeaway. So this is an understanding episode, but it's going to help you pick stocks.

Jessie: Makes sense. Yeah. Now it's all coming together. It's like when we thought the consumer,

Jess: you're using all this data to conjure up and understand what consumers are going to do. Which leads me to a little bit more data that we should talk about. Our last market update, we talked about the jobs market, too many job openings, not enough people, automation, those things. In order to measure what's happening with those job openings. And if that investment thesis is working, so here is reassessing our investment thesis is looking at the labor market…is productivity increasing is hours worked, decreasing are more people participating in the labor force. Did that 50 plus come back? Are they still retired? Are there more job openings? Where are those job openings? All of that labor market data came out this past week.

Jessie: What was it telling us?

Jess: So it's still what we call a red hot labor market. We're looking for it to cool down, but we still want unemployment to remain low. So unemployment still was low. It did cool off because less jobs were added than before. There still was 187,000 jobs added, but it wasn't as much. There were less layoffs. Health care was the biggest growing sector. And this is where everything goes together. Healthcare, since that was the largest growing sector within the services industry, or overall within this labor market report, that was also the best performing earnings sector. Think about that for a moment. We should put a puzzle together. If you have more jobs, like if we were to hire a bunch of people for this podcast, that means we're growing. We could afford it. So if you see jobs in a certain sector or a certain company, that's a sign of health, they're expanding, they're growing, and that's happening in healthcare. And that supports our other investment thesis, which is an aging population.

Jessie: Oh, right. But you said healthcare prices are also going up?

Jess: They are. That's why they had higher earnings.

Jessie: Is that because they're paying their people more?

Jess: That's part of it because that's a really tight labor market right there, is the healthcare workers.

Jessie: Yeah, interesting.

Jess: It was the top three industries with the highest job growth for the last month. Healthcare was in there.

Jessie: So if you wanted to invest in healthcare and the stock market, I'm... Assuming there are ETFs and mutual funds and things for that sector.

Jess: Yeah, you can go to a screener to find individual securities or there are ETFs for every single sector.

Jessie: Cool.

Jess: Last data point. You know, I want to talk about Swiftenomics and I'm gonna because it's actually really relevant.

Jessie: It is very relevant.

Jess: So what I'm physically personally looking for in the CPI and the PPI data is the services inflation. That's what we're calling super sticky, meaning it just won't go down. people are still traveling, people are buying flights, people are getting hotel rooms. And I really think that's because of a combination of things. It was Bey, you know, my beehive girls out there. And it was Taylor Swift with her Eras tour, two icons. I have a ton of friends that say, you know what? I want to experience this and this is my savings and I'm gonna spend it. And that's fine.

Jessie: I just talked to someone the other night who's flying to multiple Beyonce concerts. Like. around. So, that Taylor Swift tour just ended, right?

Jess: Domestically. So, she's actually going to do three more in Florida. Even Fed Powell said it himself that is contributing to inflation.

Jessie: He talked about Swiftonomics?

Jess: He sure did.

Jessie: Wow.

Jess: He sure did.

Jessie: Did he say that word? Who's coining that term?

Jess: I don't think, I don't know who coined that term. I did coin, however, Swiftal stimulus. She gave everybody 100,000. dollar bonus. That was our Swiftal stimulus into the economy.

Jessie: So that might continue to help us see some improvements in consumer discretionary spending.

Jess: Probably.

Jessie: Perhaps.

Jess: Yes. What we want to see is hotel prices going down, airline tickets going down, sticky services inflation coming down, and that will be reflected in CPI because that also has categories too. So those are what you're looking for to understand what's going to happen with the market. It all boils down to is the consumer okay? Do they have a job? And where are they spending their money?

Jessie: Right.

Jess: There's your stock market update.

Jessie: Well, that's the end of our stock market reading for August.

Jess: We want to explain what is happening in the market. Market MakeHer style, which means expert explanations with an educational flair.

Jessie: Keyword. Flair. And don't forget to check out the episode equity on our website for even more details on today's topic.

Jess: If you found today's episode helpful, do not keep it to yourself. Spread the word, share our podcast with your friends, rate us, leave a comment and subscribe. Please rate us and leave a comment. I learned today that really helps the Apple podcast chart things. So please do that. Thanks.

Jessie: The algorithm goddesses. Yes. Your feedback fuels our mission to financially empower everyone. So until next time, keep investing, keep learning, and keep breaking those barriers.