October: Tricks and Treats

Tricks and Treats

With third quarter earnings season in the rearview for most companies reporting on a calendar year quarter, we are pausing to take a look at the last month. October was a spooky month in many respects, stocks rallied after logging their worst year-to-date performance in 20 years through the end of September. The S&P 500 ended the month up 8%, bringing its year-to-date decline to 19% through October 31st. Energy stocks rallied 25% in October while technology stocks lagged, with the NASDAQ Composite up 4% for the month. According to Bank of America, investors with classic “60/40” stock-bond portfolios are facing their worst returns this year in over a century.

The Federal Reserve continued to play the role of grim reaper in global financial markets, as expectations for additional supersized rate increases drove Treasury yields even higher. The 10-year Treasury yield was 4.10% on Halloween, up from 3.83% at the end of September and 1.52% at the end of December. Higher rates have contributed to a strengthening U.S. Dollar, which has negatively impacted financial results for companies with significant foreign currency exposures and made products priced in U.S. Dollars more expensive to foreign buyers. In our “FX and Opex” column, we take a closer look at how eight large-cap technology companies handled investor messaging around the impact of foreign exchange and their efforts to offset macro and other headwinds through cost reductions.

The ghost of COVID-19 continued to haunt technology companies, as evidenced by some pretty scary September quarter earnings reports from the likes of Snap, Meta, Amazon, and Alphabet. Consumers are spending more time in the real world and less time at home watching streaming services and buying products online. Companies like Amazon, which overestimated the durability of the surge in pandemic-era demand and invested accordingly, have seen profits decline as expense growth increasingly outpaces revenue growth. More broadly, the inflation brought on by COVID-19 is casting a pall over the entire market as an increasingly broad consensus for a monetary policy-driven 2023 recession has emerged.

In this environment, equity investors expect corporate management teams to clearly articulate how, and to what extent, their results have been impacted by macroeconomic factors. Investors also expect increased transparency into foreign exchange exposures and the actual and expected impact of the stronger dollar on revenues and profits. And with most investors expecting an imminent recession, they want to feel comfortable that their portfolio company management teams are clear-eyed about the potential risks a recession poses for their business and have taken prudent actions to insulate the business from an economic downturn. As debt grows increasingly expensive and more difficult to come by, investors also want to ensure that CFOs are prudently deploying their capital. De-leveraging, which was certainly not a priority during the recent era of historically low interest rates, is back in vogue. We hope you enjoy reading this month’s Monitor and pass it along to others to subscribe. Happy reading!

“Everyone I know is on it.” Diabetes drug Ozempic has become widely popular among elites. From Hollywood stars to Elon Musk, people are using the insulin-boosting, appetite-suppressing drug to lose weight, leading Patti Stanger, star and executive producer of the reality show ‘The Millionaire Matchmaker,’ to comment that everyone she knows is on the drug. “It’s definitely a dinner conversation in the Hamptons,” added New York City writer Cat Marnell.
Cataclysmic Variables. Unlike the lonely sun, about half the stars in our Milky Way galaxy are in a long-term committed relationship with another star, orbiting each another in a celestial marriage called a binary system. Researchers recently described in the journal Nature one of these marriages gone wrong - a twosome that borders on the extreme, with the pair whirling around each other every 51 minutes in the fastest such orbital period known for a rare class of binary stars. As part of the drama, one star is eating its companion. "Basically, they were bound together for 8 billion years in a binary orbit. And now, right before the second one could end its stellar life cycle and become a white dwarf in the way that stars normally do - by evolving into a type of star called a red giant - the leftover white dwarf remnant of the first star interrupted the end of the companion's lifecycle and started slowly consuming it," said MIT astrophysicist Kevin Burdge, lead author of the study.

Chimeric brains. Neuroscientists at Stanford University transplanted tiny blobs of neural tissue known as organoids into the brains of newborn rats. The human cells grew and made functional connections within the rat brain, generating hybrid neural circuits, the researchers said in a study published in the journal Nature. The study has raised ethical concerns about animal welfare and how to classify animals with “chimeric brains,” or brains that have both human and animal cells.
Suicide bombers in space. Last month, 6.8 million miles from Earth, NASA’s DART spacecraft accomplished its suicide bombing mission by slamming into an egg-shaped asteroid named Dimorphos at 14,000 miles per hour and changing its orbit. "This is a watershed moment for planetary defense and a watershed moment for humanity," NASA chief Bill Nelson told reporters in announcing the results. "It felt like a movie plot, but this was not Hollywood.

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