Wall Street drops as AI worries pummel chipmakers
Market Scorecard
Yesterday, US markets did a u-turn lower in the last hour of trading, after coughing up a gain that had surpassed 1%. Healthcare and technology companies led the drop, with Apple (NASDAQ:AAPL) sliding more than 2% on its worst day in almost three weeks. The iPhone maker announced plans to slow hiring and spending growth next year in some divisions to cope with the potential economic downturn.
In more company news, Goldman Sachs (NYSE:GS) closed up 2.2% after the investment bank reported better-than-expected results, while Bank of America (NYSE:BAC) ended little changed after the firm said its second-quarter profits declined 32%. Elsewhere, IBM (NYSE:IBM) posted its highest sales growth in a decade but lowered its forecast for free cash flow due to the impact of the strong dollar and loss of business in Russia.
Yesterday, the JSE All-share soared 2.96%, the S&P 500 fell 0.84%, and the Nasdaq retreated by 0.81%.
Byron's Beats
Like Amazon (NASDAQ:AMZN) last month, Alphabet (NASDAQ:GOOGL) (parent of Google) has done a stock split. This will reflect in your portfolio as of 18 July. The ratio is also 20-for-1. For every one share you owned, you now own 20 Alphabet shares. The value of your shares is divided by 20, so there is absolutely no change in the value of your holding.
It does now mean that all the chunky stocks in your account are a lot more manageable. Alphabet and Amazon trade at around $110 a share. I execute most of the trades in the US accounts, it certainly makes my life easier.
Let's hope that both Amazon and Alphabet have to do another stock split in a few years' time after reaching $2 000 a share again.
Michael's Musings
The economy is a weird, complicated machine. One of its quirks is that expectations drive reality; intangibles become tangible.
If we expect inflation to be high, it creates a tailwind for increased prices. From an assumption of higher prices, we then ask for larger salary increases and we don't push back when service charges like insurance or haircuts, start to cost more. Due to us expecting prices to go up, consumers then push prices up to those levels.
The same is true about our confidence in future economic growth. When people feel that tough times are ahead, they hunker down and spend less. Lower spending then leads to slower growth rates.
The US is in a weird place at the moment, many economic indicators show a very strong and resilient economy, but many people are forecasting a recession ahead. As this Bloomberg article points out, The US Risks Talking Itself Into a Recession, Moody's Economist Says. As mentioned in the intro, Apple is cutting its spending in anticipation of tough times.
The same is applicable locally. Through a mix of loadshedding and other issues, many people feel glum about our future. Last week, my Musing about the Canadian business setting up its headquarters in Cape Town was a reminder that outsiders still see growth potential in South Africa. It could become a self-fulfilling forecast if more people feel positive about the future.
Bright's Banter
Buy Now Pay Later (BNPL) has successfully infiltrated and muddled the sea of online shopping. A McKinsey survey showed that 30% of US consumers used BNPL to make a purchase in 2021; 10% of those consumers would not have made the purchase if BNPL hadn't been available, and 19% would have bought fewer items. This probably means they shouldn't have bought it at all.
In other words, BNPL is incentivising customers, specifically younger consumers, to spend more than they usually would. This is great for the retailer, as it means bigger baskets at checkout. But it is also putting a generation of young people in debt, and let's be clear, debt isn't an innovation.
One-third of Gen-Z BNPL users report falling behind on their payments and BNPL service provider Klarna lost more than $450 million last year from credit defaults. BNPL is a loan and a loan is the same as debt. It's time for regulators to step up and take a long hard look at what could be a predatory lending service. BNPL isn't innovation it is debt.
Signing Off
Asian markets are subdued this morning, hampered by a drop in technology shares in Hong Kong and a retreat in China amid rising Covid infections and deepening turmoil in the nation's property sector.
On the earnings front, J&J will report this afternoon. Then Netflix (NASDAQ:NFLX) will kick off second-quarter earnings for major tech companies when it reports this evening. Profit growth for the sector is expected to slow sharply.
US equity futures inched higher in early trade in the wake of another reversal. The Rand is trading at around R17.14 to the US Dollar.
Happy Tuesday.
