A version of this article first appeared on TKer.co.
Artificial Intelligence (AI) is all the rage right now, with businesses all over the world excited by its potential to capture and process vast amounts of data to create cost-effective goods and services that are as good as, or better than, those made by humans.
While some jobs will be eliminated, new ones are expected to be created, and productivity gains are expected to boost companies’ profit margins and drive profit growth, which is good news for the stock market.
Yet these debates have focused primarily on financial gain and conjure up images of a dark dystopia in which intangible values are taken for granted and the human touch is lost.
Fortunately, as history has shown, emerging technology doesn’t mean the end of the very thing it was meant to improve.
“As technology becomes more pervasive and individuals become more reliant on it to communicate across networks, the value people place on ‘authenticity’ and human connections that evoke nostalgic images of simpler, pre-digital life will likely increase,” Goldman Sachs’ Peter Oppenheimer wrote. “This applies to many product categories, including food.”
In his research paper on AI, Oppenheimer gives examples of handcrafted, low-tech, “retro” goods and services that have survived technological advances. Here is an excerpt from his notes:
…The growth of artificial immersive entertainment may also drive demand for real-world experiences. This may reflect the growing popularity of goods and services that are perceived as “authentic” or nostalgic. Retro “crafts” are growing in popularity. Reality TV shows in which participants compete in bread-baking, spelling, sowing, and even ballroom dancing contests have become popular.
These trends are also spreading to retail. For example, according to Grand View Research, the market for so-called “artisanal” bakery products is expected to be valued at $95.13 billion globally in 2022, with a compound growth rate of 5.7% from 2023 to 2030. The focus on sustainability combined with an interest in the past creates new consumer markets. According to a study conducted by GlobalData for the US second-hand store ThredUP, the market for second-hand clothing is growing 15 times faster than traditional retail. According to a Statistica report, as of 2021, 42% of millennial and Gen Z respondents said they are likely to buy second-hand goods.
You might think that the widespread availability of ride-sharing options would dramatically reduce the demand for owned transportation. But that’s not the case. From the memo:
The story continues
Similar trends are seen in the transport sector, with the growth of the sharing economy and the growth of bikes, scooters and car sharing. Few could have predicted the steady growth of the bicycle market 10 years ago. The global bicycle market is valued at over $64 billion in 2022, with a compound growth rate of 9.7% from 2023 to 2030. Perhaps even more surprising is that bicycle sales are outpacing car sales. According to an analysis of 30 European countries by the Confederation of the European Bicycle Industry (CONEBI) and the European Cyclists Federation (ECF), if the current trajectory continues, bicycle sales in Europe will increase by 10 million units per year by 2030, a 47% increase compared to 2019. On this basis, 30 million bicycles sold per year in Europe would be more than double the annual number of cars sold.
As the world moves forward, it’s interesting to consider what value consumers place on the past. From the note:
In the 21st century, in a highly digitalized world where nearly everyone is connected to the Internet and cutting-edge technology threatens to destroy jobs and businesses, it’s significant that LVMH is one of Europe’s largest companies. The company sells the value of its historic brands’ heritage. It was founded in 1987 with the merger of two older companies, Louis Vuitton (founded in 1854) and Moët Hennessy, which itself was created in 1971 with the merger of champagne maker Moët & Chandon (founded in 1743) and cognac maker Hennessy (founded in 1765). According to its website, the company is developing a brand that “perfectly encapsulates everything that it has stood for for its customers over the centuries.”
Intangible value is also a type of value, and people certainly see intangible value in improved goods and services.
It’s not easy to explain why we care about this, but the point is that we care about this.
And we demand this.
And when enough people demand something, companies will appear to supply it — this is just basic economics and capitalism at work.
Consider macro cross currents
Last week there were several notable data points and macroeconomic trends to consider.
Inflation is slowing. The Consumer Price Index (CPI) rose 2.5% year-on-year in August, down from 2.9% in July. That was the lowest since February 2021. Core CPI, which adjusts for food and energy prices, rose 3.2%, unchanged from the previous month.
Month-on-month, the CPI rose 0.2% as energy prices fell 0.8%. Core CPI increased 0.3%.
When the three-month trends in the monthly figures (which reflect short-term trends in prices) are annualized, the CPI increased 1.1% and the core CPI increased 2.1%.
Inflation has been hovering around the Federal Reserve’s 2% target rate, which has led the central bank to suggest that a rate cut may be imminent.
Inflation expectations remain subdued: According to the New York Fed’s September Survey of Consumer Expectations, “The one-year and five-year median inflation expectations remained unchanged in August at 3.0% and 2.8%, respectively. The three-year median inflation expectations recovered somewhat from their lows in July, rising to 2.5% from 2.3%.”
“Inflation expectations one year out have fallen for the fourth consecutive month to 2.7%. The current reading is the lowest since December 2020 and is well within the two-year pre-pandemic range of 2.3% to 3.0%. Longer-term inflation expectations were little changed, rising slightly to 3.1% this month from 3.0% last month. Longer-term inflation expectations remain at a slightly higher level compared to the range of readings over the two-year period prior to the pandemic.”
Consumer sentiment is improving. According to the University of Michigan Survey of Consumers for September, “Consumer sentiment rose to its highest level since May 2024, the second consecutive month of increases and about 2% higher than August. The increase was driven by improved purchasing conditions for durable goods due to more favorable prices perceived by consumers. Personal finances and one-year outlook for the economy also improved, despite a slight weakening in the labor market outlook.”
Wage growth is slowing: Average hourly earnings rose 4.6% year-over-year in August, down from 4.7% in July, according to the Atlanta Fed’s wage growth tracker.
Oil prices are falling. Brent crude futures fell below $70 a barrel on Tuesday for the first time in more than two years, closing at their lowest since December 2021. From Bloomberg: “Weak economic data from the U.S. and China, including weak import data released on Tuesday, has raised concerns about oil demand in the two biggest consumers and created fears of a surplus next year, extending a record bearish market. A surge in production from producers outside the Organization of the Petroleum Exporting Countries has also exacerbated the situation.”
Gasoline prices are falling. From AAA: “The national average price for a gallon of gasoline continued its steep decline, dropping 6 cents from last week to $3.24. The decline was primarily due to weaker demand and lower oil prices.”
Real incomes are rising. According to the Census, “median real household income in 2023 will be $80,610, up 4.0 percent from the 2022 estimate of $77,540. This is the first statistically significant annual increase in real household income since 2019.”
Meanwhile, the poverty rate has fallen. According to the census, “the official poverty rate for 2023 will decrease by 0.4 percentage points to 11.1 percent. In 2023, 36.8 million people will be living in poverty, statistically unchanged from 2022.”
Card spending data remains stable. Bank of America states: “Bank of America’s total credit and debit card spending per household increased 0.9% year over year in August, recovering from a 0.4% year over year decline in July. On a month-over-month basis, it decreased 0.2% in August from a 0.3% increase in July, which likely reflects a normalization rather than weakening in consumer spending. In aggregate terms, momentum in services spending remains stronger than merchandise spending.”
Jobless claims rose slightly. Initial claims for unemployment benefits rose to 230,000 in the week ended Sept. 7, up from 228,000 the previous week. The measure remains at a level historically associated with economic growth.
Mortgage rates are falling. The average 30-year fixed-rate mortgage fell to 6.2% from 6.35% last week, according to Freddie Mac. According to Freddie Mac, “Mortgage rates have fallen more than half a percentage point over the past six weeks to their lowest levels since February 2023. Rates continue to soften as more muted economic data is released. However, despite the improving mortgage rate environment, prospective buyers negotiating the combination of rising home prices and continued supply shortages remain in a wait-and-see position.”
There are 146 million homes in the U.S., of which 86 million are owner-occupied and 39% are mortgage-free. Most of those with mortgages have fixed-rate mortgages, and the majority of those were fixed before interest rates spiked from rock-bottom in 2021. That means most homeowners aren’t particularly sensitive to fluctuations in home prices or mortgage rates.
Small Business Optimism Falls. The NFIB’s Small Business Optimism Index fell in August.
Importantly, the more tangible “hard” components of the index are holding up much better than the more emotion-focused “soft” components.
Keep in mind that in times of stress, soft data tends to be exaggerated more than actual hard data.
Near-term GDP growth forecasts remain positive, with the Atlanta Fed’s GDPNow model predicting that real GDP growth will rise 2.5% in the third quarter.
Putting it all together
Evidence continues to suggest that a bullish “Goldilocks” soft landing scenario is underway, in which inflation falls to manageable levels without the economy falling into recession.
This comes as the Federal Reserve continues to employ very strict monetary policy as part of its ongoing efforts to tame inflation, but with inflation having fallen significantly from its 2022 highs, the Fed has taken a less hawkish stance in recent months and has signaled it will start cutting interest rates soon.
For monetary policy to be considered accommodative, it would take several rate cuts, and so one would have to be prepared for a prolonged period of relatively tough financial conditions (higher interest rates, tighter lending standards, lower equity valuations, etc.), which means that monetary policy would be relatively unfavorable to markets for the time being, and the risk of the economy slipping into recession would be relatively increased.
At the same time, we know that stocks are a discount mechanism, meaning that they will likely bottom out before the Fed signals a significant dovish shift in monetary policy.
And while recession risks are rising, we should also remember that consumers are in very good financial shape: those who are unemployed are finding jobs and those with jobs are getting raises.
Similarly, corporate financial positions are strong, as many companies have locked in debt at low interest rates in recent years. Despite the looming threat of rising debt-servicing costs, high profit margins give companies some room to absorb rising costs.
At present, the downturn is unlikely to turn into an economic catastrophe, given that consumers and businesses remain in very strong financial positions.
And long-term investors should always remember that recessions and bear markets are inevitable when entering the stock market with the goal of generating long-term income. While the market has had a volatile year recently, the long-term outlook for stocks remains bright.
For more on how the macro story is evolving, check out our previous TKer Macro Crosscurrents.
