The Macro: Meta, Warren, and Satya

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/ Meta earnings relief. Meta Platforms’ first quarter report on Wednesday was mixed. Which in today’s market passes for good, and on Thursday shares rose 17% in response. Revenue in the first quarter and expected revenue in the second was shy of expectations for the company. But profits beat forecasts and costs are coming down. Active users at Facebook also rose in Q1 after an unexpected decline in Q4. At ~$205 per share, Meta stock is still down about 40% this year. But with tech stocks out of favor and Meta’s strategy in transition, “not worse” becomes “good” for investors.

2/ King dollar. The stealth story unfolding in financial markets over the last month has been the surge in the value of the dollar. On Thursday, the Japanese yen fell to a 20-year low against the dollar, while the euro has nearly reached parity – or a 1:1 value – with the dollar. For Americans traveling internationally this summer, this is good news. For the rest of the global economy, this is less positive. A complete discussion of what a strong dollar “means” is beyond the scope of this quick note. Interest rates rising faster in the U.S. than in other developed economies is certainly a motivating factor. But amid a moment of stress for the global economy, we again see investors seeking the safety of greenbacks. Fears of dollar debasement again seem allayed through another economic cycle.

3/ “I don’t know her.” In the investment world, the easiest story a company can tell about itself is that it wants to be the “X of Y.” Or, at least, that had been the easiest story to tell; now, it might be an albatross hanging around management’s neck. This week, we heard Spotify CEO Daniel Ek take pains to distance his company from Netflix. “I've said this before, but I'll say it again, besides both being media companies and being primarily subscription revenue companies, that's kind of where the similarities end for me,” Ek said regarding comparisons between Spotify and Netflix. Investors, however, seem to disagree. Since Spotify went public in the fall of 2018, its stock is down just over 34%. Over that same period, Netflix shares have lost 33%; the Nasdaq is up about 80% over this timeframe. “Netflix for music” might be an unfair characterization of both Netflix and Spotify, but the investment business isn’t built on fairness. The investment business is built on returns, and this comparison says plenty.

Two notes on growth —

One of the most important comments we heard this week came from Microsoft CEO Satya Nadella.

“I don't hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts,” Nadella told analysts on the company’s earnings conference call this week.

Amid a weak market and what appears to be a slowing economy, Nadella offered a positive take on the state of business investment, saying in so many words: all is not lost.

On Thursday morning, however, GDP data for the first quarter confirmed the importance of Nadella’s commentary, because the economy is indeed slowing down. Markedly.

In the first three months of 2022, U.S. economic output contracted at an annualized rate of 1.4%, the first decline in GDP growth since the second quarter of 2020 when the pandemic brought economic activity to a screeching halt.

Now, a single quarter’s decline in activity does not make a recession. And indeed, much of the first quarter’s “contraction” was actually the result of strong domestic demand and the aforementioned rising dollar: imports and inventory drawdowns took 4 percentage points of growth off of the Q1 data.

But this report shows U.S. economic growth outpacing the rest of the world. And just as America’s economic fortunes don’t exist in a vacuum, neither is the business of Microsoft immune from global factors.

And so on the one hand, we see steady spending in many pockets of the global business world. On the other hand, we see a global economy merely lurching forward amid lockdowns in Asia and war in Europe. The interplay between these two themes will frame the market outlook for the balance of the year. At least.

One thought for the weekend —

During the height of the Covid-induced market decline in late winter 2020, financial writer Morgan Housel fired off one of the best quips we can remember about how investors cope with bad markets.

“Friday,” Housel wrote, “quote Buffett. Monday: quote Keynes. Thursday: quote the Bible.”

With markets under pressure over the last few weeks, we’ve seen an uptick in unironic Buffett quotes. And just in time.

On Saturday, Buffett-led conglomerate Berkshire Hathaway will host its annual shareholders meeting in Omaha. Buffett, his partner Charlie Munger, and Berkshire vice chairs Greg Abel and Ajit Jain will take about 6 hours of questions from the media, analysts, and Berkshire shareholders inside a basketball arena.

If a spring Saturday afternoon spent inside a dark arena listening to four guys with an average age of 80 talk about business doesn’t sound like your idea of fun, we understand.

But for those investors needing a few bits of Buffett wisdom as a pick-me-up during this market cycle, Saturday is your Super Bowl.