POP QUIZ

From its 2000 peak to 2002 trough during the early internet “dot-com bubble” on Wall Street, by how much did the tech-heavy Nasdaq index fall? (Scroll to the bottom to find the answer!)

IN THE NEWS

🛍️ Amazon’s New (Chinese) Challenge

After years of being unchallenged by other competitors, the rise of fast-fashion rivalries in the U.S. signals larger battles ahead for Amazon.

The e-commerce giant wants to counter the escalating threat from two emerging online shopping rivals: Shein and Temu.

• Their growing popularity among U.S. consumers is chipping away at Amazon’s substantial market lead.

New competitors: The E-commerce app Temu offers affordable Chinese-made goods and resembles an online dollar store, positioning it in direct competition with Amazon and its $1.4 trillion market value.

And Shein recently launched a marketplace for U.S. customers, creating a channel for independent merchants to sell products. The Wall Street Journal reports that thousands of Amazon sellers have joined the new platform.

• Although Amazon has long faced competition from the likes of Walmart and Target, Temu and Shein, both from China, are capitalizing on the demand for inexpensive items without focusing on quick delivery or customer service.

Gen Z’s favorite: As with any brand, service, or trend, new generations typically discover their favorites.

• Shein is emerging as Gen Z’s preferred shopping app, posing a threat to Amazon’s long-term grip on American consumers, particularly since Amazon primarily attracts consumers between 36-43 and older.

Why it matters:

As the inflation burst of the past two years weighs on families, American consumers are increasingly inclined to explore cheaper options like Temu and Shein.

• Since Temu introduced its services in the U.S. in late 2022, its monthly unique web visits from American shoppers have increased over tenfold, while Shein’s has doubled.

Amazon’s response: Company executives have acknowledged demand for low-priced items that take longer to deliver and are considering whether to make such products more visible and accessible on their own platform.

• Still, they haven’t yet taken measures to align their prices with Temu, which is famous for its aggressive pricing strategy.
• Take a digital stroll through Temu’s site, and you can find things like “Smart Watches” for $9.98, men’s slippers for $5.77, and wireless headphones for $7.69. Buyer beware.

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🤕 Treasury Bonds Get Clobbered After Fed Meeting

As you may recall from earlier this week, the Federal Reserve opted not to raise interest rates again at its September meeting. One would be forgiven for thinking that this “pause” would give the bond market a moment to breathe — it hasn’t.

For context: When the Fed raises short-term rates as part of its monetary policy against inflation, it ripples through and affects all outstanding bonds, causing bond prices to fall.

But the Fed didn’t raise rates…

So why is there, in Bloomberg’s words, a “post-Fed bond rout”?

• If everyone expected a pause, pausing alone shouldn’t cause disruption because it should be “priced in.”
• But it wasn’t the pause that threw off bond investors. It was the Fed’s statements about the future and commitment to keeping interest rates elevated that prompted markets to respond harshly.

In other words, investors were hoping for a pause AND a flexible outlook on rate cuts next year. They got the former, but the ladder was far less flexible than hoped.

• One macro strategist commented, “Bond yields are no longer about how many hikes remain…but rather how many cuts we’re going to get for the foreseeable future. And there, messaging from the likes of the Fed was decidedly less than friendly.”

Why it matters:

The market for U.S. government debt (Treasury bonds) is on track for its third year of losses.

• 10-year Treasury bond prices fell to levels not seen since the Great Financial Crisis after the Fed’s pause decision, pushing yields to 4.5%.

A few things are compounding the negative reaction to the Fed’s stern outlook:

A strong economy. As Bloomberg puts it, “The resilience of the U.S. economy in the face of the steepest rate increases for a generation is spurring a flight from bonds” because the economy looks on track to dodge a recession, which some call a “soft landing.”

• For much of the year, many investors have been expecting a recession that would force the Fed to cut interest rates dramatically.

Lots of government spending. The U.S. typically spends record amounts of money during recessions to stimulate the economy or during periods of war (or, more recently, during a pandemic.)

• But huge budget deficits have continued since the pandemic’s end, and that spending must be financed in the Treasury market, where more bonds issued to fund spending weigh on existing bond prices.
• The Congressional Budget Office in May predicted the budget deficit will total $20 trillion over the coming decade, as federal debt held by the public reaches 119% of GDP — the highest in US history.

⚖️ Strategists Weigh Hard Vs. Soft Landing Into Year-End

While bond investors worry about a soft landing hurting bond prices, stock investors are selling hand over fist — but for different (and overlapping) reasons.

Bank of America (BoA) strategists say stock investors — typically different people on Wall Street than the bond investors we detailed above — have dumped stocks at the fastest pace since December, fearing higher-for-longer interest rates (similar to bond investors.)

But many stock investors worry high rates could cause a “hard” economic landing, generally defined as an economic slowdown after a period of growth — the opposite of the soft landing many bond investors anticipate.

The evidence of a weakening economy is already here, Bank of America strategists say:

• Unemployment ticking up
• Higher personal savings rates
• Higher defaults and delinquencies on consumer borrowings

The BoA strategists are bearish, even with the S&P 500 up about 13% this year. But stocks have been shaky since late July as the Federal Reserve indicated it could keep interest rates high. The S&P 500 and the tech-heavy Nasdaq 100 are en route for their biggest monthly declines since December.

• The Bank of America note this week comes as many other Wall Street strategists turned bullish.

Is it more bad timing? The same group of strategists was historically bearish entering 2023, failing to call the 16% first-half rally for the S&P 500.

• Strategists slowly raised their price targets as the market rose this summer. But traders have become anxious over the Federal Reserve’s ability to deliver a soft landing, and market turbulence has ensued.

Why it matters:

Confused about what’s coming next? Join the club. One takeaway: The Fed’s announced intentions of keeping rates high are weighing on bond and stock investors.

While Fed Chair Jerome Powell reiterated the Fed’s view that cooling inflation is priority numero uno, bulls argue that corporate earnings remain strong and could drive stocks higher into 2024.

• Said one bullish strategist: “American businesses and the economy…are showing that 5% interest rates are not crippling to earnings or growth or an improving economic climate.”

Look, trying to accurately predict the economy or the stock market’s direction is virtually impossible. There’s a reason even the savviest investors simply don’t make market predictions.

Reverse psychology: One Bank of America researcher tracked performance from 1999 to 2022, finding that, in short: Bearish predictions actually make a year-end rally more likely, and vice versa.

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TRIVIA ANSWER

The Nasdaq fell by about 80% from peak to trough after the dot-com bubble burst at the start of the 21st century.