Remember the Animal Spirits
McDonald's closes its offices to lay people off remotely... The jobs market is getting weaker... Why this may not matter for stock prices... Remember the animal spirits... The market is looking past recession expectations...
'McDonald's closes American offices amid expected layoffs'...
On Sunday night, my wife read me (Corey McLaughlin) this headline out loud while doom-scrolling on her phone. "Do you know about this?" she said, somewhat stunned. And she doesn't even eat McDonald's cheeseburgers.
I'm sure she's not the only one who is getting concerned about news of more layoffs at big businesses... especially as Americans rack up record amounts of debt amid still-40-year high inflation rates and business costs.
The development at McDonald's (MCD) is somewhat old news, but it's partly a sign of today's economic (and cultural) climate too. Back in January, McDonald's management announced it could be cutting an undisclosed number of its roughly 45,000 U.S. corporate office jobs as the company "reprioritized" parts of its business.
In an internal memo to employees in January, McDonald's CEO Chris Kempczinski said...
This will help us move faster as an organization, while reducing our global costs and freeing up resources to invest in our growth.
Those job cuts have finally arrived this week. McDonald's told all of its U.S. corporate employees to work from home and that the layoffs would be communicated virtually "to ensure the comfort and confidentiality of our people during the notification period."
There's something to be said for that strategy, which avoids any unruly in-person confrontations. Though on the flip side, the alternative is being told you're being let go while in your own house, or in an e-mail or phone call while moving about town. Plus, you're left fretting for days about getting the notification that you're out of work.
That can't be a good feeling...
McDonald's management didn't emphasize the layoffs as a cost-saving measure but, well, they primarily are just that. Increasing costs for food and other expenses have been cutting into profit margins at McDonald's restaurants.
In response, though, the company – which makes tons of cash through its franchise model, which notably includes owning real estate and leasing properties to franchisees – is trimming higher-cost corporate jobs in U.S. offices to improve its bottom line.
The broader point is...
Overall, the national unemployment rate is still near a record low at 3.6%. Cost-cutting in big tech has been a story for months, yet the jobs market overall has remained relatively strong.
Like McDonald's, Walmart (WMT) is reportedly laying off several thousand workers at its distribution warehouses. Companies like Disney (DIS) and Tyson Foods (TSN) have also recently announced layoffs.
Taken together, these layoffs may be a sign of a material move into "official" recession territory, marked by a rising unemployment rate, at least among more highly paid workers who are deemed expendable by management.
At the least, the persistently "tight" labor market we've seen since the start of the pandemic – with businesses begging for workers and offering big salary increases and work-from-home-benefits – is getting weaker.
A fresh round of jobs data today affirmed this idea...
The Labor Department's Job Openings and Labor Turnover Survey ("JOLTS") showed the number of job openings in the U.S. falling below 10 million for the first time in nearly two years.
Open positions totaled 9.93 million, below Wall Street analyst consensus expectations for 10.4 million, and the economy is very likely to keep slowing.
There's a really important thing to note, though...
The economy is not the stock market, and vice versa...
By that, I mean stock prices ebb and flow on very different timelines from economic data like employment numbers or the latest headlines. And a lot of investors have been expecting a recession for a while.
Yes, there are times when economic news and stock market action correlate perfectly. But more often, stock prices tend to reflect forward-looking expectations while economic data represent backward-looking reality.
Through the first quarter of 2023, at least, despite the news about more and more layoffs now or in the future and a recession, the market has been looking past those risks. Instead, investors are looking ahead to the next developments that may affect business six months, nine months, or a year from now.
Case in point: McDonald's shares are up 5% in the past two weeks, and they have edged higher the past two days. As our colleague and DailyWealth Trader editor Chris Igou pointed out yesterday, hope for what may come next – a pause in the Federal Reserve's rate-hiking – is overriding fears of a recession... for now.
The thinking is that with the economy showing signs of weakening, the central bank may be inclined to hit the pause button on its inflation fight after one final rate hike in May. Whether that will happen or not remains in question. Nevertheless...
Successful investing often means recognizing these patterns...
What we're about to say may feel counterintuitive, but that's the point. As our Director of Research Matt Weinschenk shared in the January edition of our Portfolio Solutions products...
Here's a stylized chart of how you should think about it...
Unlike the economy, the market doesn't move because of stats or figures. It moves because the great mass of investors has willed it to. Matt quoted a 1936 book by John Maynard Keynes, in which the economist wrote that the market is driven by...
... animal spirits – of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
As Matt put it...
In other words, people start buying stocks because they feel like it, not because they've updated their spreadsheets and rationally changed their minds.
This idea may help anyone who has ever thought, "Why is the market up when things are so bad today?" Or, to make the question more specific to the present day, "Why is the S&P 500 Index up 15% since October if a recession is coming?"
Matt's conclusion back in January's edition of Portfolio Solutions was that we might be seeing early signs of the "animal spirits" awakening. It has appeared prescient following the market's first-quarter performance, at least...
If you accept that we are heading into a recession, you'll want to act before it has fully played out. The market's feeling will turn ahead of the economic data.
Today, everyone thinks a recession is coming. In turn, since the market is priced on expectations, we could actually be closer to the bear market bottom than anyone believes... fears of a looming recession be damned.
Our Ten Stock Trader editor Greg Diamond is one who believes in that line of thinking... He told subscribers today to add to a pair of leveraged bullish positions, and added another trade betting on stocks pushing higher.
We can't say for sure what's going to come next, and a recession will bring with it more painful job losses and contracting economic growth, with consequences for the markets. We can only make smart risk-reward decisions.
The bulls have been winning – for now...
A debt crisis may be in the offing down the road. But for now, high yield spreads – an indicator of credit market health – have actually decreased over the past two weeks... And the 2-year/10-year Treasury yield spread is churning sideways, but not down, perhaps another bullish sign.
Meanwhile, the U.S. Dollar Index is trading below its short- and long-term technical trend lines... And even with a decline of the major U.S. indexes today, more than half of stocks in the S&P 500 are above their 200-day moving averages.
Add it all up, and the big bearish headwinds of 2022 appear in the rearview mirror...
But that's not to say there are no risks to consider today. There always are – like rising oil prices, for example. And another start to earnings season may bring with it reports from corporate America about declining profits or other surprise news.
And if or when the U.S. economy is deemed to be in a "recession" by the powers that be, risky sectors that have enjoyed a bull run at the start of 2023 will likely be hit the hardest. Safe havens – like consumer staples stocks, bonds, and gold – will hold up better.
The Fed may also surprise some people in the months ahead by continuing to raise interest rates beyond what the central bank has indicated lately. That would throw some volatility into the markets...
But so far this year, many bullish bets have been winners despite the reality of more and more people being laid off, at home or otherwise.
The Wild Card for Gold and Silver
Peter Krauth, editor of Silver Stock Investor and author of The Great Silver Bull, explains that while silver's price action tends to correlate with gold's movement, silver has its own bullish tailwinds, like its use in solar technologies and electric vehicles.
"Silver surrounds us and we don't even realize it," Krauth tells our editor-at-large Daniela Cambone...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 4/3/23): Alamos Gold (AGI), CBOE Global Markets (CBOE), Copart (CPRT), SPDR EURO STOXX 50 Fund (FEZ), Hershey (HSY), McDonald's (MCD), MYR Group (MYRG), Novo Nordisk (NVO), NVR (NVR), Sprouts Farmers Market (SFM), Stryker (SYK), and Unilever (UL).
In today's mailbag, feedback on yesterday's Digest about the OPEC oil cartel and the inevitability of higher energy prices... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Corey, I always appreciate your Digests. Today you have hit on a very sore spot with me, not because of your writing, but because of the content.
"As the United States has depleted it's oil reserves, we have seen the price of oil go down. Now that they have gone down, OPEC is reducing supplies which has and will result in significant increases in the price of gasoline creating more inflation. The Biden administration proposed replenishing the reserve by buying oil from non OPEC countries to replenish the reserve. That did not work. At the same time they criticized and condemned US oil companies about their profits.
"It does not take a genius to figure out that these companies need those profits to ramp up production. I don't see any government actions to help them to do that. Actually the government has stymied their efforts by denying new leases, until recently. I think they have now realized their mistake and are opening new leases that are opposed by their own constituents...
"As inflation persists, the Biden administration continues to brag about increasing employment with new socialist policies. Higher employment fuels inflation and the cost of these policies increases our government debt. I would wish that everyone in our country would be employed rather than sucking from the government trough. It seems our president is bent on ignoring [the Federal Reserve's Federal Open Market Committee], letting inflation rise and looking for our country to succeed [from] his own socialist policies that steal from hard working and saving people to give it away to idlers to make it work.
"Now is not the time if we want to see inflation decrease..." – Paid-up subscriber Tim L.
All the best,
Corey McLaughlin
Baltimore, Maryland
April 4, 2023