Wall Street + AI

By Matthew Gutierrez, Shawn O'Malley, and Weronika Pycek · September 18, 2023

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‘Merica ??

It’s been nearly 15 years since the Great Financial Crisis. And, post-2008, the S&P 500 has been on a steady climb higher, even if you leave out Big Tech.

???As you’ll see below, U.S. equities have outperformed international markets by a wide margin.

— Weronika, Shawn, and Matthew

Here’s today’s rundown:

POP QUIZ

?Which U.S. States have the highest percentage of home ownership in America? (Scroll to the bottom to find the answer!)

Today, we'll discuss the three biggest stories in markets:

• Why companies are easing off on share buybacks
• The AI tools coming to Wall Street
• America’s housing affordability issues linger

All this, and more, in just 5 minutes to read.

CHART(S) OF THE DAY

IN THE NEWS

?? Companies Ease Off On Share Buybacks Amid High Rates

A triple whammy is discouraging big companies from buying back their shares: high-interest rates, growing pressure to re-invest in the business, and regional banking turmoil.

• Share buybacks on the U.S. stock market have fallen to the slowest pace since the early days of the pandemic.
• Companies spent $175 billion buying back shares in the second quarter this year, per data from S&P Global — a 20% decline from the same quarter last year and a 19% decline from the first quarter of 2023.

A what? Companies buy back their shares using cash, often to boost stock values by reducing the number of shares outstanding (increasing remaining shares’ equity stake) and improving commonly referenced earnings-per-share figures (fewer shares for the same amount of earnings.)

Some see this as financial engineering — a sleight of hand. Still, many large American companies are frequent “share repurchasers,” including Apple, the country’s most valuable company.

• The share-purchasing slowdown could start a longer-term trend amid a “higher for longer” interest rate environment and reducing support for stock prices.
• If share buybacks continue to decline, stock market returns could also decline.

Why it matters:

Corporate buybacks have been under focus in recent years. They’re an alternative to dividends for returning capital to shareholders for big companies, but they’re also controversial.

• Critics accuse companies of using them to artificially inflate their share prices and reward executives rather than invest in long-term projects or increase pay for employees on the low end of the totem pole.
• But with higher financing costs, buybacks are simply less of a priority. Said one economist: “When rates were zero, it made sense for companies to issue long-date, low-rate debt and use it to buy back shares. Now, not so much.”
• Plus, companies feel pressure to invest in new technologies, like artificial intelligence and green energy solutions.

Of course, the decline in share buybacks could last for several quarters (or years), and the S&P 500 could continue marching higher. As many pundits have said, there are always smart-sounding reasons to sell stocks. But the trend is worth watching as the fourth quarter approaches.

Read more

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? ?AI Tools Come to Wall Street

Will AI tools replace or complement existing white-collar jobs? Probably a mix of both.

Morgan Stanley is leaning into the ladder option, unveiling an AI assistant derived from ChatGPT’s latest software to complement human financial advisors.

• The company’s co-president said in a memo, “Financial advisors will always be at the center of Morgan Stanley’s wealth management universe.”
• He added, “We also believe that generative AI will revolutionize client interaction, bring new efficiencies to advisor practices, and ultimately help free up time to do what (advisors) do best: serve (their) clients.”

AI Era: The tool offers financial advisors easy access to a database of some 100,000 research reports and documents, kicking off the “generative AI era on Wall Street,” as Hugh Son of CNBC put it. The hope is to consolidate the bank’s “intellectual capital” into one tool.

• Others on Wall Street don’t want to be left in the dust, with Goldman Sachs and JPMorgan Chase announcing similar projects.
• But Morgan Stanley is the first big finance firm to put these tools in employees’ hands.

Why it matters:

Morgan Stanley’s ChatGPT tool intends to save advisors and customer service reps time in answering market questions, providing recommendations, and reviewing internal processes, allowing them to engage more with clients.

After ChatGPT’s release nearly ‘broke the internet’ with hype, the world has been waiting to see what use cases for the technology will prove most relevant and lasting.

• And Morgan Stanley’s experiment will answer some of those questions, at least in the financial services industry.

More to come: The bank says this is just the first of a series of generative AI initiatives. Another tool called “Debrief” will automatically summarize client meetings in follow-up emails.

• “I’ve never seen anything like this in my career, and I’ve been doing artificial intelligence for 20 years,” said one executive.
• “We saw a window of opportunity that was just completely disruptive, and I think as an organization, we didn’t want to get left behind.”

Read more

MORE HEADLINES

??Beyond the automakers: How the UAW strike may hit the U.S. economy ???Turkish president asks Musk to build Tesla factory in Turkey

??? Wage gap costs women more than $1.6 trillion per year, per report

???? More than 10% of Japan’s population is age 80 or older, intensifying the country’s demographic crisis

?? Americans Can Barely Afford Homes, Impatience & Skepticism Mount

The lack of housing affordability in the U.S. puts pressure on buyers and renters, with political consequences looming.

Purchasing a home now demands a significantly larger portion of an individual's income — the market is the least affordable?since 1984.

• Optimism is low for things to change, too. U.S. home prices continue to rise as 30-year fixed mortgage rates hit a 22-year peak of 7.23%, making mortgages more unaffordable than ever.
• The general rule for home-buyer hopefuls is that spending over 30% of one’s income on housing is "unaffordable." Homes spending more than 30% on housing are called "cost-burdened."

Common issue: Housing affordability weighs on millions of Americans. From 2019 to 2021, the number of cost-burdened households rose by 2.3 million to 19 million, according to a Harvard University report.

• This includes 8.7 million people, or 23% of homeowners, who spend over half their income on housing.

In Milwaukee, a major city in the swing state of Wisconsin, housing affordability has worsened significantly over the past year — the area saw one of the largest upticks in mortgage burdens among metropolitan areas over the last year.

• It’s a nationwide trend: record-high mortgage rates in August and low housing supply have resulted in fewer people applying for home loans and surging prices, both for buying and renting.

Why it matters:

The major metro regions in swing states saw the largest decline in housing affordability over the past year, which could be a political liability for President Joe Biden, particularly among young voters who supported him in 2020.

In numbers:

• A poll by SocialSphere found that for Gen Z, lack of housing affordability is a major cause of dissatisfaction.
• A survey by Pew Research Center this spring revealed that 66% of U.S. adults between 18-29 and?62% between 30-49 lack confidence in Biden's economic decision-making.

Read more

TRIVIA ANSWER

?West Virginia?has the highest percentage of home ownership in America (79%), followed by Minnesota and Maine (76%). The District of Columbia (34%), California, and New York (54%) have the lowest percentage of home ownership, mostly due to the high cost of living.

SEE YOU NEXT TIME!

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