Market News 7/31

Markets

As the economy approaches a soft landing, the S&P 500 is poised to conclude July with its fifth consecutive monthly gain (barring any unexpected downturn). However, caution is warranted as we enter August and September, historically identified by Bloomberg as the two most challenging months for the index over the past three decades.

The Benefit of Owning Stocks Over Bonds Keeps Shrinking

The disparity in rewards between holding stocks versus bonds has diminished significantly, reaching its lowest point in the last two decades. This development poses a potential threat to the recent strong performance of major stock indexes.

One way to assess the attractiveness of stocks is by comparing their earnings yield (calculated by dividing a company's anticipated earnings over the next year by its stock price) to the yield on government bonds, which is often considered the closest approximation to a risk-free return. The difference between these yields, known as the equity-risk premium, indicates the additional compensation investors receive for taking on the higher risk associated with owning stocks.

Currently, this compensation is considerably low.

Last week, the gap between the earnings yield of the S&P 500 and the yield on the 10-year U.S. government bond shrank to approximately 1.1 percentage points, the narrowest margin since 2002. Moreover, the spread between the earnings yield and the yield on the 10-year Treasury inflation-protected security, which some analysts view as a more relevant benchmark due to corporate earnings adjusting with inflation, has also declined to its lowest level since 2003, hovering around 3.5 percentage points.

Politics

Trump accusations continue

Despite his mounting legal issues, former President Trump's polling numbers have not been significantly affected. However, the legal challenges are taking a substantial toll on his campaign's finances. According to the Washington Post, Trump's political action committee (PAC), Save America, is expected to reveal that it spent a staggering $40.2 million in the first half of 2023 to cover legal costs in defense of Trump and his associates. This amount exceeds the total funds raised by his campaign during the second quarter.

Tech

Maybe Social Media isn’t why we hate each other

The common belief that Facebook's and Instagram's algorithms create echo chambers that worsen political divisions and undermine democracy in the United States has been challenged by groundbreaking new research. While many people might agree with the notion that social media platforms contribute to political polarization, recent studies have revealed a more complex reality.

Researchers conducted experiments from September to December 2020, altering the content shown to US Facebook users and monitoring their behaviors during and after the study. One such study involved replacing the algorithmic feed with a reverse chronological feed for tens of thousands of users on Facebook and Instagram, effectively changing the type of posts they saw from what the platforms intended to show to an unfiltered stream of posts.

Surprisingly, these alterations had no significant impact on political polarization, contrary to the assertions of Facebook's critics. Moreover, the change led users to encounter more untrustworthy content and resulted in decreased engagement as people grew bored and spent less time on the platforms.

Researchers summarized their findings by stating that these results challenge the prevailing narrative that blames social media echo chambers for the issues facing contemporary American democracy.

However, independent experts advise caution in drawing broad conclusions from these studies, as they examined behavior over only a few months. The topic remains under scrutiny, with at least 12 more peer-reviewed papers expected to shed further light on the matter.

It's important to note that the research itself has faced controversy due to Meta's involvement as a key collaborator, providing the data for the studies. Meta (formerly known as Facebook) and the researchers are already in conflict regarding how to interpret the findings.

Sports

Women’s World Cup

The USWNT's last World Cup group stage match against Portugal is scheduled for Tuesday at 3am ET. After a disappointing 1-1 draw against the Netherlands, the team's chances of advancing to the knockout stage are still alive, as they can qualify with either a win or a tie. The tournament saw a significant upset when Colombia secured a surprising victory against Germany over the weekend.