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Growth Team Weekly Investment Insights

24 July 2024   |  

After a few weeks off due to vacation and working through the quarter-end rush, we are back.

1) Deflation

Starting at a higher level, there has been a lot of data released over the past few weeks that point to a macro environment of slowing inflation and a slowing (albeit still strong) economy.

The June consumer price index (CPI) reading showed a monthly decrease of 0.1%. The last time the US had a deflationary CPI reading was July 2022. This follows a 0.0% reading in May.

Source: FactSet, Bureau of Labor Statistics. As of 7/11/2024.

 

 

 

 

 

 

 

 

 

 

 

 

One of the driving factors of the recent fall is shelter inflation, which registered a 0.2% MoM reading (the lowest since August 2021). This has been largely expected due to its lag compared to real-time estimates from housing companies like Zillow.

Source: FactSet, Bureau of Labor Statistics. As of 7/11/2024.

 

 

 

 

 

 

 

 

 

 

 

 

2) The Great Rotation

This kicked off a historic market rotation. Rates fell as the market priced in a September Fed rate cut, and smaller, cyclical and higher-debt companies all rallied.  Looking at rolling five-business-day returns of the Russell 2000® Index versus the NASDAQ Composite Index, we just experienced a period of ~13% outperformance. This was the biggest disparity (in either direction) of the last 20+ years! 

Source: FactSet/Russell/NASDAQ. As of 7/19/2024. Past performance does not guarantee and is not a reliable indicator of future results.
 

If we dissect the Russell 1000® Index returns since CPI day on July 11, cyclical sectors, along with smaller and more indebted companies, outperformed, as fears of future refinancing pressures eased.

Source: FactSet/Russell/GICS. As of 7/19/2024. Past performance does not guarantee and is not a reliable indicator of future results.
 
Source: FactSet/Russell. As of 7/19/2024. Past performance does not guarantee and is not a reliable indicator of future results.
 
Source: FactSet/Russell/GICS. As of 7/19/2024. Past performance does not guarantee and is not a reliable indicator of future results.
 

3) Semiconductors: The Perfect Storm?

Semiconductors have hit the perforce storm. As we highlighted earlier, the market has at least temporarily rotated away from growth companies in the technology sector. At the same time, these companies have been pressured by rhetoric from both sides of the political aisle. First, Donald Trump commented that “Taiwan should pay us for defense,” and second, President Joe Biden’s administration indicated that it is considering using the most severe trade restrictions available against China.

The industry group went from outperforming the broader index by >500bps on July 10 to underperforming by -600bps, an 11% swing in relative returns in just seven trading days.

Source: FactSet/MSCI/GICS. As of 7/19/2024. Past performance does not guarantee and is not a reliable indicator of future results.
 

4) Netflix Rakes in Subscribers, Earnings and Emmy Nominations

Netflix continued its impressive run of adding new users, reporting eight million new subscribers in its most recent earnings release. However, the company warned that its next reported new subscriber number would likely be lower than a year ago, given the challenging comparison versus when its password-sharing crackdown went into full effect.

  • Earnings rose 48% to $4.88 a share on revenue of $9.6bn, beating expectations. And management raised its full-year revenue estimate.
  • The advertising tier grew by 34% versus the previous quarter and now accounts for 45% of total sign-ups in markets where it is available.  Netflix said the “number one priority is gaining scale” in its advertising business, which it was doing by hiring new salespeople and building its own ad platform to replace the current Microsoft system.

Netflix’s fundamental results remain encouraging, and the future continues to look bright, considering the benign competitive environment and its production of quality content. This year, it surpassed HBO for the most Emmy nominations.

Source: Statista, as of 7/18/2024.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5) Big US Banks Warn of Financial Stress Among Lower-Income Customers

This Financial Times article summarizes some of the findings from the latest batch of financial results from the big US banks. One common theme was evidence of stress among lower-income consumers.

  • Profits at Citi’s US consumer lending business declined 74% YoY. The bank said consumer spending was slowing overall, with account balances now lower than they were before COVID.
  • JPMorgan said the bank’s “broad take is that the consumer is fine.” However, “in the lower-income segment, you start to see a little bit of evidence of some rotation in the spending out of discretionary into non-discretionary.”
  • BNY warned that “inflation is very painful to many people,” particularly those without savings. “You can see the early signs of that portion of the population [who do not have assets to invest in the stock market] having depleted the reserves they had built up through the pandemic and are confronting the fact that the overall level of prices is just higher.”
  • Wells Fargo said, “When you look below the surface and really dig into what is happening across differing consumers, you see that the lower-income folks are struggling.”

 

 

 

 

 

 

 

 

 

 

 

 

 

Artisan Partners Growth Team manages portfolios that held securities issued by Netflix as of 6/30/24.  Portfolio securities are subject to change.

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