Friday, Feb 18th 2022

The Macro: Metaverse, Markets, and Bad Moods

Commentary

The below content and projections are the opinion of the authors. Any conclusions or takeaways are their own. This should not be considered as investment advice. Investing involves the risk of loss and returns are not guaranteed.

Three Things this week

1/ Palace intrigue in the metaverse.

On Tuesday, February 17, Meta Platforms CEO Mark Zuckerberg told the company’s employees they had a new name to call one another — Metamates. Whether you think this is strong internal branding or not, the more notable personnel move came on Wednesday when Nick Clegg, formerly the U.K.’s deputy prime minister, was named the company’s President of Global Affairs. In this new role, Clegg will be Meta’s primary point person on all policy-related matters. Clegg also now reports directly to both Zuckerberg and Meta COO Sheryl Sandberg; previously, he’d only reported to Sandberg. In its reporting on this move, Bloomberg noted Zuckerberg wants to spend more time on product and technology while giving less of his attention to content moderation and regulation. Whether Zuckerberg is able to keep these parts of the Meta Platforms empire distinct remains to be seen. But by trying to create a structure to step back from some of the legacy challenges facing Facebook and Instagram, the company’s founder is sending a pointed message on where he thinks the business’s next act will take place.

2/ Earnings challenges continue.

With interest rates rising ahead of anticipated rate hikes from the Federal Reserve, investor tolerance for slowing growth remains low. This week offered several examples. Perhaps most jarring was the more than 50% drop seen Thursday in shares of Amplitude, the behavioral analytics company that went public via a direct listing in September 2021, after its full-year growth outlook came in below estimates. Video game maker Roblox saw shares drop over 25% on Wednesday after its fourth quarter and current quarter bookings numbers disappointed. Former Titan holdings Shopify and Fastly also saw shares punished after recent results. Shopify shares fell 16% on Wednesday and another 11% on Thursday after reporting results on Tuesday; Fastly shares dropped over 30% on Thursday after results were released after the market close on Wednesday. Even chip giant Nvidia, which offered results and a forecast ahead of estimates, saw shares fall 7% as some analysts expressed concerns over long-term margins and tech shares came under pressure on Thursday. In this market, it doesn’t take a lot to see individual names taken to the woodshed.

3/ Tensions in the headlines.

Russian troops have amassed along the Ukraine border over the last several months, raising concerns that an armed conflict could break out in that region of the world. A cursory overview of financial news in the last week surfaces a series of headlines that to varying degrees attribute the rise or fall in stocks to an escalation or easing of these tensions. Some days these reports will be more accurate than others. It is becoming clear that “geopolitical tensions” will replace “interest rate fears” as the catch-all to explain why stocks moved one way or another during a given day. For news junkies, these shifts can be interesting to follow. For long-term investors, these fear-of-the-month changes put a fine point on why we believe in buying great businesses at good prices while maintaining a multi-year time horizon — because there will always be another risk.

Two sides to the U.S. consumer

On Friday, February 11, the U.S. consumer said they were in a terrible mood. The University of Michigan’s closely followed index of consumer sentiment fell to an 11-year low in February with inflation expectations hitting a 14-year high. Not good.

However, on Wednesday, February 16, the January report on retail sales showed a 3.8% jump from the prior month, more than expected by economists. A welcome rebound after last week’s clunker.

Last month, sales at nonstore retailers, the category that includes ecommerce spending, jumped 14.5%. Meanwhile, spending at food and drinking places fell 0.9%, the second-biggest drop among non-energy categories from December to January. (Only sporting goods and hobby stores saw a larger drop, which makes sense: you don’t buy Christmas presents in January.)

This situation would make any two-handed economist pleased — on the one hand, folks are down in the dumps; on the other hand, they’re still spending money at an elevated rate.

January’s retail sales report also suggests that a trend we discussed in this space two weeks back remains in place: the pandemic is shaping consumer habits. Even as we enter the third year of our pandemic-altered day to day routines.

One thought for the weekend

The Federal Reserve has become the hottest topic in markets.

Traditional macro traders, venture capitalists, and crypto investors have all formed an opinion on what the U.S. central bank should or should not do. Much of this interest comes with good reason: the hottest inflation readings in 40 years are pressuring the Fed to raise interest rates, and the anticipation of these rate hikes are pressuring financial assets. For many investors, it has been a painful last several months.

But in case anyone is thinking the Fed might be questioning whether this discomfort can be handled by markets, on that point the central bank made itself clear this week. In its report recapping its January 25-26 policy meeting, the Fed made clear the financial system is in fine shape to tolerate a widespread drop in the value of financial assets.

“A couple of other participants cited reasons why elevated asset valuations might prove to be less of a threat to financial stability than in past reversals of asset prices,” the report read. “In particular, they noted the relatively healthy balance sheet positions of households and nonfinancial firms, the well-capitalized and liquid banking sector, and the fact that the rise in housing prices was not being fueled by a large increase in mortgage debt as suggesting that the financial system might prove resilient to shocks.”

In Plain(er) English, this means the Fed doesn’t see many similarities between perceived excesses in financial markets today and the conditions that proved most dangerous for the economy during the 2008 financial crisis. And until that view changes, a 10%, 20%, or 40% drop in some high-flying tech stock the market deemed a “pandemic winner” just isn’t going to move the policy needle.

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