April 21, 2022

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TOGETHER WITH

Happy Thursday. Can you guess what 53% of Americans cut back on in the last 6 months due to inflation? a. driving, b. dining out, c. travel. Follow the wave 🌊 below for the answer.

Here are our personal finance & investing topics for today:

Hunting for opportunities in small caps
Banks reported earnings—what we learned about our finances
Ways to save money on gas

INVESTING

Opportunities In Small Caps

Over the last 18 months or so, many of us have been frantically investing in the stock market while gleefully overlooking warnings that it might be overvalued, headed toward a bubble, or set out for some other perilous predicament after growing too fast too soon.

While these perspectives were warranted and appreciated, they also have at times ignored some of the lesser-known corners of the market, small caps. Although they undoubtedly ran hot throughout 2020-21, it seems we might’ve punished them a little too harshly for it.

The small caps journey 🚗

The Russell 2000 is the markets’ most well-known small-cap index, and it rose about 93% from March 2020 to March of 2021 alone, which is probably too much, to say the least. These small caps have been pretty muted since, and are actually down 12% since the start of 2021.
Why? About 44% of the companies in this index generate a net loss, meaning they’re mostly growth companies investing for the future and hopefully one day turning a profit. Investors decided they didn’t like this in 2021, and the party was over, but we can’t suppress smaller companies forever.
Rising rates reduce the value of future profits, especially for small growth companies, leading to lower expectations for current stock prices. Growing companies are also oftentimes the businesses that will get hurt the most when accessing capital becomes more expensive. And that’s what the market may have priced in.

Why there might be some opportunity

Recent data has shown us that when inflation expectations rise, small caps usually outperformed their larger counterparts, perhaps because smaller companies can pivot more easily. Yet for some reason, that trend has bucked its usual behavior recently. Our inflation situation is a bit unique this time. The economy seems to be growing at the same time prices are rising, a “stagflation” of sorts. So, we don’t blame you, small caps. You’re fine.
Barring a possible recession, stagflation, or other serious issues arising globally, smaller domestic companies' earnings could benefit because they have higher domestic exposure and usually a more local supply chain. And it would be reasonable to anticipate that small caps will regain some life eventually. This could present an opportunity for those who have longer time horizons of 5 years or more.

💡Related ETFs: Schwab U.S. Small-Cap ETF (SCHA), iShares Core S&P Small-Cap ETF (IJR), Vanguard Russell 2000 Index Fund (VTWO)—here's a quick compare report.

What is Fundamental Analysis?

Investing Basics

6 mins

PERSONAL FINANCE

Banks Reported Earnings—What We Learned About Our Finances

For active investors who love to keep up with their holdings and crunch numbers, earnings season is kinda like having four different holidays a year.

Nevertheless, earnings season always provides an opportunity to learn a little about a lot. From individual companies to inflation and the economy as a whole, these quarterly reports can tell us a lot about the state of things, and indicate where we may be headed.

The banking niche

Why banks? During times of historic inflation and interest rate uncertainty, banks earnings can give us a solid glimpse into the impacts they have on consumers. After all, they do handle our money and everything.
Findings from JPM: Data from JPMorgan Chase’s earnings showed noteworthy swings in a lot of categories. Mortgage originations dropped 37% from a year ago, auto loans dropped 25%, and credit card spending rose 29%. Simultaneously, deposits for consumers and small businesses (so basically all accounts except large corporations’) were up 15%, hinting at solid cash flows.
Broader picture: While these consumer numbers from JPM show us a little, it helps to zoom out. Most major banks themselves also reported significant drops in revenue during Q1, JPMorgan’s drop being 42%, Citi’s 46%, Wells Fargo 21%, and Morgan Stanley 11%.

What it might tell us

About the housing market: As evidenced by reports from multiple banks, mortgage originations are falling drastically. This indicates what many have suggested, which is that rising rates, hitting 5% last week, might help to finally dampen the white-hot housing market.
About the used car market: We’ve also just seen the price of used cars fall for the first time in a while in this most recent CPI report. This, combined with lower auto loans, suggests some alleviation here, too.
About personal balance sheets: Credit card spending is up by 29%, and we know this from more than just earnings reports. On the other hand, credit card loans have risen by 15%. Does that mean that people are running out of the savings they stashed in 2020 and 2021? It’s likely.
About the banking sector: Banks have been benefiting from favorable conditions for a while, and that’s come to an end. With inflation finally being dealt with in the form of rising rates, geopolitical matters, and the general broad surge of demand for financial products waning a bit, big banks may face a return to reality.

MONEY TIPS

Ways To Save Money On Gas

If you’re someone who's able to work from home, we’d like to extend both a congratulations and a welcome to a whole new set of problems. But hey, at least you’re saving money on your commute automatically, right?

If you drive for work, there’s no doubt that the cost of fuel is eating into profit margins, especially that of small businesses. Fortunately though, there are some solutions to the pain. They could go a long way if you implement them for the long haul.

💵 First, pay with cash: You’ve seen the signs before of course, where gas stations display different prices for cash and credit? Businesses have to pay a processing fee when you pay with a credit card, so offering a cheaper price for cash is a way to incentivize against that, and it can save you up to 10-15 cents per gallon. There are also credit cards that actually give cashback when you pay for fuel, so these could also work.
🤝 Try out a loyalty program: Fuel is fuel, or so you would think, but big-name gas stations would say otherwise, and they think pretty highly of their unique blends and service stations, just compare a Shell or BP pump to one at Sam’s Club. Well, these “special” gas stations often offer membership cards that give you discounts, points, and you know, all that cool stuff. Most of these are free too, so… what do you have to lose?
🚶‍♀️ Drive less: “Wow, thanks captain obvious, didn’t think of that.” Sorry, but it’s true. It’s easy to overlook the cost of gas when using it, because it’s not like you have to pay to leave home, that cost is incurred later when you realize it’s on E. Because of this, it’s easy to let ourselves make frivolous extra trips that we could’ve otherwise skipped, and these do add up. Whether it’s carpooling or ordering groceries, there is always another way.

🔥 TODAY'S MOVERS & SHAKERS

Tesla (+6.7%) reported record profit and beat revenue estimates as consumers clamored for its cars. The EV maker cautioned investors that chip and parts shortage would still affect its deliveries; as more EVs reach consumers, the need for public and at-home charging devices would also rise
Airlines stocks are soaring today; AAL (+5.7%) reported narrower losses than estimates; UAL (+12.5%) missed on both top- and bottom-line estimates but said that it will have a much better quarter due to a surge in travel
Xerox (-16.3%) missed the street's profit estimates as inflation and supply-chain pressures affected its production
Sleep Number (-10%), the mattress maker, missed on financials as they continue to struggle with supply chain woes
Bitcoin (BTC) +1.94% to $42,077.03
Ethereum (ETH) +1.04% to $3,101.44

This commentary is as of 9:05 am PDT.

🌊 BY THE WAY

🍱 Answer: Dining out. Due to higher prices, 53% of Americans cut back on dining out, 39% cut back on driving, and 35% canceled a monthly subscription in the past 6 months (CNBC)
💔 ICYMI: Is the remote work honeymoon phase over? (Finny)
💰 People are saving money and paying off debt through ‘cash stuffing.’ Here’s how it works (CNBC)
🤔 How Tech Companies Are Trying to Woo Employees Returning to Work (NYTimes)
Finny lesson of the day. Learn or refresh on the basics of what an ETF or exchange-traded fund is:

What Are ETFs?

Investing Basics

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The Gist is Finny's twice a week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice or endorsements. The Gist content team: Austin Payne, Othmane Zizi, Chihee Kim.

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