POP QUIZ

If you had invested $10,000 in the S&P 500 on the first trading day of 2001, how much would it have been worth at the end of last year? (Scroll to the bottom to find the answer!)

IN THE NEWS

💸 Americans Are Still Spending Like There’s No Tomorrow

YOLO: “You only live once.”

Given the rise in interest rates, persistent inflation, decreasing pandemic savings, and a slowing labor market, it’s logical to expect consumers to reduce spending.

Yet Americans keep swiping their credit cards for travel, concerts, handbags, and restaurants, even as prices stay high.

In August, Americans’ spending increased by 5.8% compared to the previous year, significantly surpassing inflation, which was under 4%.

• The “experience economy” surged this summer. Delta Air Lines posted record revenues in the second quarter, and Ticketmaster’s ticket sales climbed nearly 18% year-over-year to over 295 million in the first half of 2023.
• The proportion of households claiming to have made at least one big purchase in the last four months rose to 64%, its highest level since 2015.

Pausing the American Dream: A challenging housing market has pushed many to forego traditional savings goals, while the pandemic highlighted the uncertainty of health and employment.

• In short, Americans are investing in experiences, knowing they might not have the same opportunity later, reports The Wall Street Journal.
• One consumer spoke for many when he said: “I just hit a point where the thing that we had been talking about maybe hopefully doing someday, we’re going to do it now. I’m not going to worry about money anymore.”

Why it matters:

Consumer splurging won’t last forever, but it does make the Fed’s job to cool inflation harder. It also raises questions about how effective interest rates are in manipulating peoples’ purchasing decisions.

• Still, student loan repayments, persistent inflation, or a spike in job layoffs will eventually cause individuals to curb spending, among other reasons.

Takeaways for the Fed: Pushing rates up across the economy is a ‘blunt force’ tool for policymakers to fight inflation, not a scalpel.

• The question, then, is when people don’t respond to the economic logic of blunt-force tools like raising interest rates nationwide, do you continue to lean into them?
• By and large, for the Fed, the answer remains “yes,” perhaps because few viable alternatives to conventional monetary policy exist.

Read more

🇯🇵 Japan’s Stock Market is on a Hot Streak

Japan is the place to be. Well, yes, for great sushi and ramen, but also stock investing: Japan’s stock market has produced the best returns of any major, advanced economy in 2023.

Land of the rising sun: The Oracle of Omaha, Warren Buffett, gave the country his investment blessing earlier this spring in a series of comments, and foreign cash has poured in since — Japanese stocks are up 20% since late March.

Investors have long maligned Japanese stocks for the country’s slow economic growth and for having less shareholder-friendly regulations, stock exchanges, and corporate structures.

• There’s growing optimism that these headwinds are fading, though.

Sinking yen: Japan’s collapsing currency value creates a mirage, making Japanese stocks (as priced in yen) appear to perform better than when translated into U.S. dollars.

• As the Wall Street Journal reports, “when the yen’s moves are stripped out, the Japanese market has matched the U.S. almost perfectly.”
• While the yen’s exchange rate has declined against the dollar, that’s offset some of Japan’s incredible stock market gains for American investors.

Put differently, when you invest outside your home country, you take all of the risks inherent to regular investing, but you also take currency risk — fluctuating exchange rates can either work in your favor or detriment.

How it works: Suppose an American investor owns shares in a Japanese company valued at 1 million yen.

• If the exchange rate is initially 100 yen to the dollar, those shares are worth $10,000.
• But if the yen depreciates and the exchange rate becomes 110 yen to the dollar (meaning it takes more yen to buy one dollar), the same shares are now worth about $9,090, even if their yen value hasn’t changed.

Why it matters:

The yen’s depreciation has been a big domestic issue, prompting policymakers to intervene several times to prop up its value in foreign exchange markets, especially as inflation has picked up for the first time in decades.

Geopolitical advantages: Despite having tradeoffs for foreign stock investors, a depreciating yen is good for manufacturing (Japanese goods become cheaper to purchase thanks to the weaker exchange rate.)

• This comes when many Western companies want to diversify supply chains outside of China to nearby hubs, which naturally draws more investment to Japan, accelerated by the yen’s languishing exchange rate versus other major currencies.

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TRIVIA ANSWER

Had you invested $10,000 in the S&P 500 on the first day of 2001, you’d have roughly $45,200 at the end of 2022, despite numerous drawdowns, including the Great Financial Crisis, the 2020 pandemic crash, and the 2022 bear market.