Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Morningstar estimates that as of 2022, there is nearly $3 trillion invested in target date mutual funds. Per Morningstar: Target date strategies remain the investment vehicle of choice for retirement savers.

Whether retirement savers in target date funds know it or not, and we presume most don’t, they are mindlessly investing their wealth. The allocations between stocks and bonds in these funds are not based on risk or reward but solely on the calendar. Managing target date funds requires zero investment expertise, yet mutual fund and ETF managers rake in hundreds of millions of dollars a year in management fees.

The volatile market environment helps us appreciate why target date funds are foolish.

What Are Target Date Funds?

• Barrons estimates that approximately 42% of all retirement plan dollars are in target date funds.

• Per Investopedia, more than 75% of investors have some money in target date funds.

• The Department of Labor claims that 70% of employers use target date funds as their default investment.

Target Funds are passive mutual funds run by simple algorithms. To be frank, the word algorithm makes their investment process seem more complicated than it is.   

The funds with the target dates furthest in the future are almost fully allocated to stocks with a minimal allocation to bonds. As each year passes, the funds slowly allocate away from stocks and toward bonds. The stock-bond targets for the funds are based solely on the target date.

The graphic below, courtesy of Vanguard, the world’s largest manager of target date funds, shows the “glide path” of investment allocations based on age.

Time dictates the funds’ allocation between stocks and bonds, not the traditional metrics investors use, like potential risks, rewards, and valuations.

Do You Care About Expected Returns? 

Target date fund investors, by default, must believe that stocks will outperform bonds over the long haul. While such is often true, it is far from accurate over shorter or medium-term periods. Further, such a longer-term approach misses incredible short- to medium-term opportunities in stocks and bonds. Accordingly, target fund investors are sometimes making poor investments, which may not align with their investment goals.

To help appreciate these inherently flawed investment strategies, we ask two questions. In both questions, we ask you to allocate your retirement nest egg into A and B securities.

Question 1: 

Security A has an expected ten-year annualized total return of 6.00% with a likely range of returns of 0% to 12%. Security B has a guaranteed annualized return of 0.75%.

Question 2:

Security A has an expected ten-year annualized return of 2.50% with a likely range of returns from 7.00% to -4.50%. Security B has a guaranteed annualized return of 5.00%.

If you favored A in the first question and B in the second, expected returns and risk probabilities matter to you.

Question 1 is based on data from March 2020, when stock valuations cheapened considerably, and bond yields were among the lowest in U.S. history.

Question 2 corresponds to the current investment environment for stocks and bonds.

Questions 1 and 2 represent recent extremes of stock and bond return expectations. More importantly, they correspond to periods when target date stock and bond allocation percentages were likely inappropriate for a decent proportion of target date fund investors.

What About Today?

Let’s go into more detail on question 2 to better appreciate the current risk-reward framework for stocks and bonds. To repeat question 2:

Security A (stocks) has an expected ten-year annualized return of 2.50% with a likely range of returns from 7.00% to -4.50%. Security B (bonds) has a guaranteed annualized return of 5.00%.

Should a 2025 target date fund be heavily invested in bonds while a 2055 fund be almost solely invested in stocks in the current environment?  

The easy way to answer is by studying the graph below. It shows every monthly instance of CAPE 10 stock valuations and the following ten-year return, including dividends. The green line shows the current ten-year UST yield (4.90%), and the blue line indicates the investment-grade corporate bond yield (6.45%).

The current CAPE, as starred, is slightly over 30. The yellow box highlights each instance when CAPE was 30 or greater.

The expected annualized total return on stocks for the next ten years is 2.35%, much lower than the returns on bonds. Of all the instances in which CAPE was greater than 30, only a few of them were followed by a ten-year period in which stock returns beat Treasury bond returns. The number dwindles to one when stocks are compared to investment-grade corporate bonds.

Let’s take the analysis further and focus on maximum drawdowns when CAPE was greater than 30. The following graph shows the peak percentage drawdown from the month each CAPE valuation eclipsed 30. As it shows, skewing allocations toward bonds in environments like today allows you to preserve cash and take advantage of lower stock prices.

Ten Year Forecasts Don’t Mean Ten Year Investments

Bonds are much more likely to offer a better return over the next decade than stocks. However, and this is a big issue, markets change rapidly. In a year, we could be amid a recession with bond yields at 2% and equity valuations near normal. If so, profits on bonds should be taken, and a reallocation back toward stocks would likely be appropriate.

Target date funds will not adjust for the lopsided return probabilities. Target-date funds are blind to risk and reward. Therefore, they are indifferent to what is in the best interest of their investors.

Summary

In the current environment, 25-year-olds and 75-year-olds should have increased allocations to bonds versus stocks. In target date fund terminology, the 2025 and 2050 funds should look much more alike than they do. The Vanguard 2050 fund holds under 10% of bonds and 90% of stocks. The Vanguard 2025 fund has approximately 45% of bonds and 55% of stocks.

A blind formula dictates these percentages, not basic financial investment management rules.

Investing for the long run is thoughtful. Investing without considering risks and rewards is idiotic.

Remember when Democrats insisted that Trump was compromised by Russia because of some alleged loan he had in the early 90’s according to ‘several sources with knowledge’ (who never materialized)?

The same Democrats – and the same media, are of course dead silent over what’s now grown to $240,000 in laundered Chinese that ended up in Joe Biden’s pocket via his brother. We know, we know – huge shock.

On Wednesday, the House Oversight Committee revealed that President Biden received $40,000 in Chinese funds which were “laundered” through his brother, James Biden, in a “complicated financial transaction” marked as a ‘loan,’ which took place just weeks after Hunter Biden threatened the Chinese with his father’s wrath in a July 30, 2017 text message to a CEFC China Energy employee.

The alleged 2017 transfer from first brother James Biden to the future president involves the same business deal in which Joe Biden was called the “big guy” and penciled in for a 10% cut — and would be the first proven instance of the commander-in-chief getting a piece of his family’s foreign income.

…

The money ended up in Joe Biden’s bank account on Sept. 3, 2017, via a check labeled “loan repayment” from his younger brother, who partnered with Hunter in the venture. -NY Post

“Remember when Joe Biden told the American people that his son didn’t make money in China?” asked Oversight Committee Chairman James Comer (R-KY) in a video posted to X. ““Well, not only did he lie about his son Hunter making money in China, but it also turns out that $40,000 in laundered China money landed in Joe Biden’s bank account in the form of a personal check.”

pic.twitter.com/UGKwRHMxNP

— Oversight Committee (@GOPoversight) November 1, 2023

pic.twitter.com/WKwuRzmYUy

— Oversight Committee (@GOPoversight) November 1, 2023

“Even if this $40,000 check was a loan repayment from James Biden, it still shows how Joe benefited from his  family cashing in on his name — with money from China no less,” Comer continued.

Bank records released this year by Comer show that CEFC — a since-defunct reputed cog in Beijing’s “Belt and Road” foreign influence campaign — paid Hunter and James Biden at least $6.1 million in 2017 and 2018 — about $1 million in March 2017 shortly after Biden left office as vice president and the remainder within 10 days of Hunter’s threat invoking his dad.

A $5 million wire was sent on Aug. 8, 2017, to “Hudson West III, a joint venture established by Hunter Biden and CEFC associate Gongwen Dong,” a committee synopsis of the memo says. -NY Post

“That same day, Hudson West III sent $400,000 to Owasco, P.C., an entity owned and controlled by Hunter Biden. On August 14, 2017, Hunter Biden wired $150,000 to Lion Hall Group, a company owned by President Biden’s brother James and sister-in-law Sara Biden,” the synopsis continues.

“On August 28, 2017, Sara Biden withdrew $50,000 in cash from Lion Hall Group. Later the same day, she deposited it into her and James Biden’s personal checking account. On September 3, 2017, Sara Biden cut a check to Joe Biden for $40,000 for a ‘loan repayment.'”

But hey, no more mean tweets!

Remember when we mocked the BEA’s recent report that Q3 GDP had hit a scorching 4.9% (well above estimates) on the back of such laughably “growth” factors as surging inventories and government consumption…

… and said prepare for Bidenomics to collapse in Q4?

Well it just did, and not once but twice.

First, it was the ISM Chair Tim Fiore who earlier today said that “the past relationship between the Manufacturing PMI and the overall economy indicates that the October reading (46.7 percent) corresponds to a change of minus-0.7 percent in real gross domestic product (GDP) on an annualized basis.”  Translation: the economy is already in contraction, which would hardly be a shock since Europe is also in contraction, China’s economy is imploding and the US will never decouple from the rest of the world.

And now, it’s the same Atlanta Fed which last quarter stunned Wall Street with its 5%+ Q3 GDP estimates, and which just came out with its second Q4 GDP forecast which was a doozy: at 1.2% it was almost 50% below the Atlanta Fed’s first Q4 GDP estimate of 2.3%.

Here are the details:

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 is 1.2 percent on November 1, down from 2.3 percent on October 27.

After this morning’s construction spending release from the US Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management, the nowcasts of fourth-quarter real personal consumption expenditures growth and fourth-quarter real gross private domestic investment growth decreased from 3.0 percent and -2.2 percent, respectively, to 1.5 percent and -2.8 percent, while the nowcast of the contribution of the change in real net exports to fourth-quarter real GDP growth increased from 0.11 percentage points to 0.22 percentage points.

Bottom line: the Bidenomics trendline that was so laughably interrupted by the one-time, artificial, and debt-driven burst in Q3 GDP is back to normal…

… and the ridiculous economic “boost” that Biden tried to represent as being the normal, is now gone. Next step: recession, rate cuts, more stimmies, and so on.

No change in policy rates… as expected; and a barely-changed statement, mean all eyes will be on Fed Chair Powell for the nuance leaning hawkish or dovish.

With money markets and many Fed officials believing that the Fed is done with rate-hikes, Powell will not want to rock the boat of the central bank “proceeding carefully” to let cumulative tightening continue to work through as inflation trends lower and the labor market rebalances.

His recent comments at The Economic Club of New York suggested ‘satisfaction‘ with current policy settings… with the ubiquitous caveat that they are ‘data dependent’.

Powell will be treading very carefully as, given the addition of the term “financial conditions” means anything less than the right amount of hawkishness will prompt the kind of reflexive gains in bonds and stocks that will reverse the tightening of financial conditions that he has been quietly comfortably allowing.

Will Powell be asked about the messaging of that one word?

addition of “financial” = Powell to Yellen: “stop spending like a drunken sailor”

— zerohedge (@zerohedge) November 1, 2023

One final point before he speaks: while most expect no surprises from the Fed, the market is uneasy about something with the implied-implied move in the S&P today is 0.89%, which would make it the highest implied move since May according to Goldman.

What are they worried about?

Watch Powell’s press conference live here (due to start at 1430ET):

Tl;dr: The Fed kept rates unchanged, as expected but the addition of one word is key:

“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

Is that The Fed sending a message to Janet Yellen: “stop spending like drunken sailors.”

*  *  *

Since The Fed’s last statement and press conference on September 20th, the market’s movements (impacted by the ongoing chaos in Israel also) have been somewhat remarkable.

Bitcoin has soared higher, stocks and bonds (the latter worse than the former) have both been hammered as gold and the dollar have rallied in unison…

Source: Bloomberg

We note that Gold has been on quite a path in the last two months but is back  – again – at around the same levels as it has been for the last two FOMC meetings…

Source: Bloomberg

Additionally, The Fed’s jawboning of “higher for longer” is increasingly being accepted by the rates market as the SOFR spreads for Dec 2023-2024 and 2023-2025 have surged since the last FOMC…

Source: Bloomberg

Of particular note, we have seen financial conditions tighten significantly since the last FOMC (while at the same time, macro surprise data has improved marginally – not fallen apart)…

Source: Bloomberg

Specifically, the period since the last FOMC brought some surprisingly strong readings on inflation and the economy more broadly. Here are some headline numbers:

• Third-quarter GDP growth was a whopping 4.9%, higher than forecast and an a historic figure for the US, where growth tends to hover around 2%-3%

• September payrolls were also strong, with employers adding 336,000 jobs, nearly double what economists had been expecting

• A variety of inflation indicators cooled less than anticipated, or posted slight gains. The employment cost index, a broad and reliable indicator, ticked up 1.1% in the third quarter, a pace far above its pre-pandemic average of 0.7%.

However, the last chart above is of increasing relevance as the narrative that “the market is doing The Fed’s job for it” continues to keep hopes alive that Powell and his pals are done (due to this dramatic tightening).

For today, expectations are for no change (0.5% odds of a rate-hike priced-in), but the market remains more dovishly priced still than The Fed’s projections (at least until 2026)…

Source: Bloomberg

The Fed statement is expected to be more or less identical to September’s.

And so, what did we get?

The Fed – as expected – left rates unchanged:

• *FED HOLDS BENCHMARK RATE IN 5.25-5.5% TARGET RANGE

The Fed leaves more hikes on the table:

• *FED REPEATS IT WILL ASSESS EXTENT OF ADDITIONAL POLICY FIRMING

And sure enough, as we noted above, The Fed likes the market doing its job for it, specifically adding reference to tighter “financial” conditions

• “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

The message is clear:

addition of “financial” = Powell to Yellen: “stop spending like a drunken sailor”

— zerohedge (@zerohedge) November 1, 2023

The question we are left with is – what is the trigger for The Fed to not ‘leave the rate hike option’ on the table.

Read the full redline below:

Powell’s press conference is coming right up but we note that despite everything very much ‘as expected’, the market is uneasy and the implied-implied move in the S&P tomorrow is 0.89%, which would make it the highest implied move since May according to Goldman.

Here’s what to expect (assume a ‘hold’)

Authored by Steve Watson via Summit News,

Former Democratic Representative Tusi Gabbard has called out the hypocrisy of LGBTQ+ activists attending pro-Palestine marches alongside radical Islamists who literally want gay and trans people to be murdered.

Appearing on Laura Ingraham’s show Tuesday, Gabbard noted that “Democrats, they have called people like me an Islamophobe for many years just for speaking the truth about radical Islam. About the threat that this Islamism poses to the freedom and peace of security of the American people and people around the world.”

Gabbard continued, “we are so concerned about Biden’s open borders and the fact that we have got millions of people coming in who are not vetted in any way, shape, or form who have not been checked.”

Ingraham interjected, “they say you can’t call it a clash of civilisations, why not? It is a clash of civilizations. No women’s rights. No belief in pluralism. The dignity of the individual. Free expression. None of that. That’s not on the table.”

The former Congresswoman replied, “And that is the hypocrisy of seeing these LGBTQIA activists out there holding and waving the trans flags combined with the Palestinian flag.”

“That’s a new level of stupid,” Ingraham asserted.

Gabbard replied, “They don’t know and understand what this Islamist ideology is, this radical Islam ideology where they actually want to kill people. They want to kill those people specifically.”

Watch:

Related:

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Update(1318ET): The Israeli death toll is rising, and Hamas has claimed to have ambushed and destroyed several tanks as they plunge deeper into Gaza City, also amid building to building searches for the hostages.

15 Israeli soldiers have now been killed in the Gaza operation, the IDF has announced Wednesday, which in total marks 320 total troops killed since the Oct. 7th massacre (and with over 1,100 more Israeli and foreign civilians). 

Hamas military wing publish scenes showing its members blowing up several Israeli tanks and vehicles south Zaitoun Neighborhood, Gaza city. pic.twitter.com/j2kslyqSv1

— Younis Tirawi | يونس (@ytirawi) November 1, 2023

Widely circulating footage shows Knesset members crying after a closed-door session (below), leading to speculation that Israeli troops could be sustaining higher than known casualty rates.

But the emotional scene is reportedly due to a special viewing in parliament of newly compiled footage of the Oct.7 terror attacks, as The Times of Israel details: 

A compilation of raw footage documenting Hamas’s grisly October 7 rampage through the western Negev was screened Wednesday for Knesset members. The 43-minute-long video was produced by the IDF Spokesperson’s Office and shows uncensored, difficult-to-watch videos, many taken from terrorists’ bodycams.

After a request from Knesset Speaker Amir Ohana to the military, lawmakers were granted permission to hold a closed-door screening of the footage where recording and cellphones were not allowed.

Ohana, speaking before the screening, said that he had arranged the event so that Israeli lawmakers would “know who and what we are facing,” and so that “we will all know how much our path in this war against this evil is justified,” according to sources familiar with the event.

…More than 50 MKs were in attendance, and some broke down in tears, including Ra’am head Mansour Abbas, the Maariv news outlet reported.

Knesset members were spotted crying after their session. IDF casualties mounting? pic.twitter.com/c7Uq4Q2Ys7

— Mats Nilsson (@mazzenilsson) November 1, 2023

* * *

The Israel Defense Forces has said it is in close quarters combat with Hamas as troops push further into Gaza, resulting in an announced Tuesday death toll of eleven. By early Wednesday that figure rose to 13 Israeli soldiers killed, after Israel’s defense minister warned of the “heavy toll” which would be paid by troops in the operation to eradicate Hamas.

As the death toll among Gazans approaches 9,000, the EU’s top diplomat Josep Borrell has lashed out at Israel’s airstrikes and massive civilian casualties. Borrel says he is “appalled by the high number of casualties following the bombing by Israel of the Jabalia refugee camp.” Jabalia camp has reportedly been struck again, a day after the initial massive attack which had killed at least 52 Palestinians, according to the Gaza Health Ministry.

But Israel’s military said that its Jabalia strike had taken out a top Hamas commander and other Hamas officers, and said Israeli decision-makers took into account the harm to civilians in the densely populated urban area.

On Wednesday Prime Minister Benjamin Netanyahu expressed condolences for the IDF’s fallen soldiers along side other leaders. He said “We are in a tough war. This will be a long war. We have important achievements, but also painful losses.”

According to more from his message: “We know that every one of our soldiers is an entire world. All of Israel embraces you, the families, from the bottom of our hearts. All of us are with you during this time of mourning. Our soldiers fell in a war where there was no justice, a war for our home,” he said. “I promise you, the citizens of Israel: we will complete the task – we will continue until victory.”

IDF troops have begun the slow process of going door to door as they search for the missing Israeli and foreign hostages, which is up to 240, according to new military statements. Hamas has issued new statements claiming Israeli airstrikes killed a group of hostages. “Seven detainees were killed in the Jabalia massacre yesterday, including three holders of foreign passports,” said a Hamas statement issued from its military wing.

IDF releases new footage of ground forces operating in the Gaza Strip. pic.twitter.com/mXQrHNaQXL

— Emanuel (Mannie) Fabian (@manniefabian) November 1, 2023

But the “painful losses” are mounting in much greater numbers for the Palestinian side, and civilians are bearing the brunt of suffering. International outrage and pressure has mounted on Tel Aviv, which has voiced that has warned Gaza civilians they must move to the southern half of the Strip if they want to escape the bombs. According to a fresh Gaza health ministry update as republished in Al Jazeera:

• The number of people killed in Israeli attacks on Gaza has gone up to 8,796, including 3,648 children and 2,290 women.
• At least 22,219 people have been wounded.
• There are 2,030 reports of people missing including 1,020 children buried under the rubble.
• 130 paramedics and medical crew have been killed, 28 ambulances have been destroyed, and there have been more than 270 attacks on the healthcare system in Gaza.
• 16 hospitals out of 35 are out of operation, and 51 out of 72 primary healthcare clinics have shut down.
• In the occupied West Bank, 128 Palestinians have been killed and at least 1,980 have been wounded.

There has meanwhile been a rare positive development on the humanitarian front. For the first time since the start of the war, foreigners and wounded Palestinians have been allowed to exit Gaza through the Rafah crossing into Egypt. 

Some 500 foreign passport holders had reportedly been stuck at Rafah crossing for weeks since the start of the conflict after Oct.7. The area near the crossing had also been bombed by Israeli jets on several occasions. Ambulances have been observed Wednesday ferrying the wounded into Egypt. 

Hundreds are foreign passport holders are also belatedly being let through, among them Americans. “At least five NGO workers who have been confirmed as Americans are listed as approved to cross on Wednesday but it remains to be seen how many of at least 400 American citizens the U.S. State Department says are stuck in Gaza will be able to cross in coming days,” CBS News reports. Some have lashed out at Washington over the lack of serious evacuation efforts in place for those dual nationals stuck in Gaza: 

“They started letting foreigners out today but it’s not Americans because I guess we’re not as important as we thought,” Utah resident Susan Beseiso told CBS News on Wednesday.  

“The American Embassy and the State Department haven’t called us since the last time we went to the border and got bombed four times. They haven’t been communicating with us or doing anything to get us out,” Beseiso said.

“It’s like they’re holding us hostages — not Hamas holding us hostages — it’s the IDF soldiers, Egypt and America. They’re using us as a human shield in a way.”

Finally, people are starting to exit the Gaza Strip into Egypt through the Rafah border crossing after delays upon delays pic.twitter.com/ufiSQN1ehc

— John Hudson (@John_Hudson) November 1, 2023

The fresh evacuees are undergoing security checks on the Egyptian side. Among those exiting include Palestinians holding Austrian, Bulgarian, Indonesian, Japanese Jordanian, Italian, Greek, Australian and Czech citizenships, and many others. Various nationals working for several NGOs are also on the departure list.

According to The Times of Israel, “A source briefed on the development told Reuters that the evacuations were agreed on in a deal mediated by Qatar between Egypt, Israel and Hamas in coordination with the US.”

Israel has rushed warships to the Red Sea, where US naval assets are also patrolling, after Yemen’s Houthis declared “war” earlier this week. The Houthis had also reportedly launched a ballistic missile at Israel, and released a video showing the launch. In total the Houthis are believed to have attempted three drone and missile attacks on Israel. One of the initial projectiles days ago had been intercepted by a US warship off Yemen, and another was stopped as follows: 

The Israeli military on Tuesday used its Arrow missile defence system for the first time to intercept an “aerial threat” over the Red Sea, believed to have been a ballistic missile.

According to newly released Israeli military images, Sa’ar-class corvettes are now patrolling near Eilat port in the Red Sea.

They will be monitoring skies over the Red Sea and around Israel after the Yemeni rebel group widely seen as backed by Iran has vowed to “help the Palestinians to victory.”

While apart from Gaza, Israel has been most focused on the Hezbollah threat on the northern border – having engaged in daily exchanges of fire with the militant group in southern Lebanon – the Yemeni action raises the specter of the situation spiraling into a broader regional war.

Sporadic fire along the occupied Golan Heights, and Israel’s attacks south of Damascus, also raises the possibility of the Gaza war spilling into Syria. 

The footage of ballistic and cruise missile launches, as well as kamikaze UAVs, by Yemeni Houthi rebels on Israeli territory has been published. pic.twitter.com/2VrZnTn7Zw

— 301 Military (@301military) November 1, 2023

According to fresh reporting in The New York Times, the Houthis are already escalating their attacks on faraway Israel:

Yemen’s Houthi militia claimed an attempted attack on southern Israel on Tuesday, saying it had launched a “large batch” of ballistic and cruise missiles as well as drones toward Israeli targets.

The Iran-backed militia carried out the attempted assault in response to what it called “brutal Israeli-American aggression” in Gaza, the Houthi military spokesman, Yahya Sarea, said on the social media platform X. Mr. Sarea said the attack was the third operation conducted by the Houthis “in support of our persecuted brothers in Palestine,” and threatened further missile and drone assaults.

#BREAKING: The IDF releases footage of Israeli Navy missile boats arriving in the area of the Red Sea after Iran-backed Houthi terrorists launched drones and missiles toward the area in an attempt to hit Israel. pic.twitter.com/BRdG0e4hiF

— Israel War Room (@IsraelWarRoom) November 1, 2023

The Houthis have been locked in a war with Saudi Arabia (and allies UAE & the US) since 2015. In 2014 the Shia rebel group overran the Yemeni capital of Sanaa, sparking the Saudi-UAE intervention to uphold the pro-Saudi government. Many tens of thousands have been killed over the last half-decade of fighting, with the country also on the brink of starvation. 

Disagreement persists among analysts over whether the Houthis possess missiles that could effectively reach Israel.

The US and Israel have long accused Tehran of shipping weapons to the Houthis. It’s believed that their surprisingly sophisticated missile arsenal comes from the Iranians, and these have been used to attack Saudi Arabia several times, including strikes on Saudi Aramco oil facilities.

When we looked at the performance of consumer stocks last quarter, we found a not unexpected divergence between companies catering to lower income consumers, which have been hammered for much of 2023, and those targeting rich buyers, which – especially in the case of a handful of European luxury giants such as LVMH, Kering and Hermes  – had done tremendously well for much of the past year, making Bernard Arnault the richest man in the world, if not for long.

Fast forwarding to today, while we have yet to hit rock bottom when it comes to lower income cohorts, it is becoming increasingly clear that the answer to our question from May, namely “did the luxury bubble just burst” is now a resounding yes as the following boom-to-bust chart of European luxury giants LVMH, Hermes and Kering shows.

Today, the bursting of the luxury bubble took its latest casualty, Estée Lauder, whose already-battered shares plummeted even more, tumbling as much as 21%, their biggest one-day drop in history, after the beauty giant slashed its full-year outlook on troubles in China and the Middle East. The stock has lost almost half of its value in 2023 alone.

As BBG notes, the owner of the MAC and Tom Ford brands has been “floundering in its crucial travel retail business in Asia due to weaker-than-expected demand.” The continued weakness in that channel, as well as an added drag from the Israel-Hamas war, show the beauty company has failed once again to get its footing, meaning it is likely to keep ceding market share to archrival L’Oréal.

For the current fiscal year, Estée Lauder expects net sales in a range of negative 2% to positive 1% versus the prior year, while earnings are seen at $2.08 to $2.35 a share. In August, it had forecast net sales to increase between 5% to 7% and saw earnings of $3.43 to $3.70 a share.

Estée Lauder said net sales in the most recent quarter fell 10%, in line with the downbeat outlook the company forecast in August (the only positive was that the company did a +6% in the Americas vs a Consensus -2%, although that too is about to reverse now that Americans are finally paying down their student loans, credit cards are maxed out and any “excess savings” are long gone).

For the current quarter, the company now expects net sales to decrease between 9% to 11% versus a year ago and sees diluted net earnings between 47 cents and 57 cents a share. The potential risks from disruption in Israel and the Middle East are expected to have a dilutive impact of 8 cents. The company doesn’t break out what portion of revenue it generates in the region.

“The big question, like last quarter, and the one before it, will be: ‘Is this the final cut?’” Bernstein analysts led by Callum Elliott wrote in a research note.

Chief Executive Officer Fabrizio Freda said in a statement that the New York-based company lowered its fiscal 2024 outlook due to slower growth in prestige beauty in Asia travel retail and mainland China, as well as the risk of disruption to its business in Israel and elsewhere in the Middle East.

Remarkably, even though Estée Lauder had already lowered expectations in the previous quarter – after already cutting its outlook several times in the past year leading to another near record price drop back in April – the market was still caught off-guard, sending the stock down the most on record. That’s raised concerns among investors that executives don’t have a good grip on what’s happening in their business.

“We thought that this quarter could be the trough and did not expect another guidance cut,” RBC Capital Markets analyst Nik Modi wrote in a research note. “All the read thrus suggested China was weak, but we thought EL’s guidance last quarter accounted for the weakness. Clearly we were wrong.”

On a call with analysts, CEO Freda said: “We expect calendar year 2023 to be the final and, frankly, painful post-Covid reset period for the company.”

Good luck with that.

Curiously, the cosmetic industry may be the one place where lower-income consumers are holding out better then their higher-income peers. Estée Lauder’s quarterly results are in contrast to competitor L’Oréal, which said late last month that sales were up 4.5% in the three months that ended on Sept. 30. While the French beauty giant – which sells more mass-market items under brands such as Maybelline New York and L’Oréal Paris – has also been hit by the slowdown in duty-free sales in China and South Korea, the business represents a much smaller portion of its revenue versus Estée Lauder.

L’Oreal’s cheaper products have sold more briskly than items from its more expensive brands as inflation-weary consumers have become pickier. Estée Lauder, meanwhile, sells more higher-end products and on Wednesday cited the “slower-than-expected recovery of overall prestige beauty.”

Which brings us to a key question: has the consumer finally hit a brick wall? While we are confident that recent results indeed confirm that consumers are virtually tapped out, a slightly more cheerful take comes from Goldman consumer trader Scott Feiler who tries to present today’s dismal results in a slightly better light.

Here is his take on today’s earnings onslaught:

• Bottom-Line Intact for 3Q: The magnitude of top-line upside has begun to slow, but companies have pretty continued to beat across the board on the EPS/EBITDA line for 3Q. Even the names with the biggest downward reactions this morning so far in the pre (Wayfair, EL, CCEP, GOOS) largely all beat EPS for this quarter.
• Top-Line Upside is slowing though: While bottom-line remains intact (for 3Q at least), the top-line upside does appear to be harder to come by. See YUM, EAT, EL, GOOS etc for prints that largely saw in-line sales, even as EPS handily beat.
• Restaurants remain a relatively bright spot in the US: YUM (+1.5% comp beat), FWRG (40 bps comp beat) and EAT (20 bps comp beat at Chili’s) are all “fine” still with still constructive commentary, even as traffic has slowed some.
• China Unsurprisingly called out as weak: 2 of the biggest stock disappointments this morning are EL (called out incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China) and YUMC (said they observed softening consumer demand emerged in late September through October).
• The 2 biggest single names in focus in our IB chats – EL and Wayfair.  
  • For EL, the guidance cut only 1 quarter in is well below any of the worst estimates we had heard. The only “positive” is the bulk of it was blamed on China (somewhat known) and the Middle East.  They did a +6% in the Americas vs a Consensus -2%, and so we think a focus on the 930AM call will be whether there were shipment benefits that helped that figure. Despite the better Americas and Jason’s note titled ““bottom perhaps finally found,” the overwhelming feedback continued to be negative this morning on lack of conviction in an EPS bottom.
  • For Wayfair, the stock dropped hard as soon as the release hit. A ton of inbounds from most asking why. Yes, revenues missed for 3Q but it was only a 1% miss vs consensus and the bogey, while margins beat by about 150 bps. The big concern here seems to be less about margins (most understand a beat was likely) and more about top-line, especially fears around 4Q. On the call, they spoke to QTD gross revenues running around flat. We think expectations were well below the consensus +5% for the full 4Q, so agree that the -10% move lower in the pre is a bit surprising. This is a shoot first, ask questions later type tape though.

Needless to say, that is hardly the kind of tape one sees at the start of bull markets.

A GOP plan to offset $14.3 billion in aid to Israel by reducing the IRS’s roughly $60 billion boost from the Inflation Reduction Act ($80 billion less negotiated cuts) would backfire and add around $30 billion to the national debt, because – according to both the CBO and the Committee for a Responsible Federal Budget (CRFB), it would reduce the amount that the agency will be able to collect via audits.

Israel, with GDP of almost half a trillion dollars and a debt-to-GDP ratio that is half of that of the United States, and a super-advanced military, still somehow needs $14.3 billion from US taxpayers in order to continue its extensive bombing campaign throughout Gaza following the October 7 Hamas terrorist attack.

While the Senate uniparty has insisted on US aid for both Israel and Ukraine (with a smattering of border security funds to mollify the America First types), House Republicans want to separate the two amid pushback from the Freedom Caucus – and pay for Israel aid by reducing the aforementioned IRS funding.

The CBO says it would decrease tax revenues by $26.7 billion, while the CFRB says it would add over $30 billion to the national debt.

Of note, the amount Congress wants to send Israel is almost precisely the amount the Trump administration wanted to secure the southern US border, which Trump said Mexico would pay for indirectly via trade deals. Instead, we’re engaged in proxy wars on at least two fronts while more than five million illegal immigrants have crossed into the United States since Biden took office.

“Paying for new spending by defunding tax enforcement is worse than not paying for it at all,” said CFRB President, Maya MacGuineas, adding “Instead of avoiding new borrowing, this plan doubles down on it.”

According to Howard Gleckman, senior Urban-Brookings Tax Policy Center fellow, said it was “pretty clear” that “cutting this kind of IRS funding would actually increase the deficit.”

“Instead of being an offset, it would actually make matters worse,” he argued. “The general rule of thumb that the budget scorekeepers use is it’s about 2-to-1. So if you cut IRS funding [by $14 billion to $15 billion], you’re actually going to increase the deficit by about $30 billion.”

Whose rule of thumb? Is there anything back that statement?

A ‘non starter’ anyway

The House is expected to vote on the proposed funding on Thursday, however Democrats say it’s a “non-starter” ion the Senate.

“If Republicans had an ounce of shame they wouldn’t condition support for Israel and Ukraine on giveaways to wealthy tax cheats. Making aid to Israel and Ukraine dependent on gutting IRS enforcement funding is an absolute nonstarter,” said Sen. Ron Wyden (D-OR), the Senate Finance Committee Chair in a Tuesday statement.

Mittens echoes neocon refrain

“I don’t think you reduce the number of IRS agents then expect that you’re going to get more tax revenue,” Sen. Mitt Romney (R-UT) told The Hill.

“I think reducing agents means less tax revenue,” he continued.

The Treasury Department said earlier this month that the U.S. borrowed $1.7 trillion in the one-year period ending in late September, a spike over the previous year that Biden officials partly attributed to low revenue.

The U.S. is currently running a $33 trillion debt, which spiked above its trend line during the pandemic as the government expanded major tax credit programs for lower earners and sent out checks to families while the economy was shut down.

As part of the Inflation Reduction Act (IRA) passed last year by Democrats, the IRS was given an additional $80 billion in funding over the subsequent 10 years. That allotment would have increased revenues by around $200 billion for a net deficit reduction of around $114 billion, according to a CBO analysis. –The Hill

Some Senate Republicans have endorsed the House measure, but acknowledge that the budgetary impact could pose a challenge.

“If you’re looking for a pay-for, which they clearly are, I think it’s as good as one as there could be,” said Sen. Kevin Cramer (R-ND).

“The challenge you’re gonna have is a CBO score.”