Week in Review (Medals, Mis-types, and Manufactured Diamonds)

By Jack Bridgeman on February 16, 2024

Happy Friday February 16th!

Stronger than expected inflation data causes investors to recalibrate. Lyft stock rose 67% after an earnings report error. Lab grown diamonds may not actually be sustainable. Olympic and Paralympic medalists will take home a piece of France after this summer’s Olympic games.

2024 Tax Guide
Tis the ‘Tax’ Season! Click the link below for the 2024 DSG Advisors Tax Reference Guide.
2024 DSG Advisors Tax Reference Guide

#1 – Weekly Market Recap – Higher than anticipated inflation data released Tuesday caused stocks to fall sharply early in the week. By Thursday, however, strong earnings reports helped stocks recover most, if not all, of the week’s declines. Through yesterday’s close the Dow Jones and S&P 500 were up +0.4% and +0.1% respectively while the NASDAQ was still -0.6% for the week.

Friday morning’s stronger than expected producer inflation data and mid-week economic updates were digested by investors throughout the week. Initial concerns about lower-than-expected retail sales and weak industrial production were countered with strong jobs data and positive home builder confidence. Analysts attributed the lackluster retail sales and industrial production to severe winter weather, mitigating fears of broader economic weakness.

The unexpected uptick in consumer prices earlier in the week initially rattled stock and bond markets alike, but Thursday’s rebound reflected that broader market sentiment remains cautiously optimistic amidst evolving economic dynamics. Early trading this morning appears to signal that investors could end the week on a more cautious tone after the release of January’s higher than expected producer inflation data.

#2 – Hot Inflation Cools Expectations – January inflation data was released Tuesday morning indicating that consumer inflation (CPI) increased +0.3%, higher than the +0.2% consensus expectation. Core CPI inflation, which removes more volatile components such as food and energy, rose +0.4%, again higher than the +0.3% expected.

Transportation, medical care services, shelter and food drove inflation higher for the month while commodities, apparel, energy, and used vehicles experienced price declines. January’s inflation report was an indication to investors that services sector inflation is proving hard to tame. Declines in goods prices are, however, helping to moderate overall inflation pressure.

Source: DSG Advisors, Bloomberg (2/15/2024)

Additionally, this morning January’s producer inflation (PPI) was higher than expected as wholesale prices rose +0.3% after falling -0.1% in December. Although producer inflation was less than consumer inflation in January, it was still higher than expected.

The hotter-than-expected inflation results are forcing investors to recognize that interest rate cuts may be pushed out and may not be as much as expected at the end of 2023. The current odds of a rate cut in March sits at just 14%.

Additionally, investors have reduced their expectations for total rate cuts in 2024, with current pricing implying 4 rate cuts during the year.

At DSG Advisors, we continue to analyze current inflation data with past inflationary periods and believe that taming the “last mile of inflation” is often much harder than investors realize. While we acknowledge that the Federal Reserve’s historically aggressive hiking cycle has pushed inflation down from 9% in the summer of 2022 to 3%, we expect that reaching the Federal Reserve’s long-term 2% inflation target could prove challenging. As a result, we anticipate that interest rates will remain “higher for longer” and will put further pressure on stocks, bonds, home prices and corporate profit margins.

#3 – The Devil is in the Details – Lyft, the ride-hailing company, found itself at the center of a stock market frenzy this week as the result of a typo in its earnings report. The mistake increased a key profit metric by a factor of 10, catapulting the stock price +67% in after-hours trading.

The typo, which mistakenly projected a 5% increase in gross margin, was promptly corrected by the company during a conference call with analysts. Lyft’s CFO, Erin Brewer, clarified that the actual increase in gross margin was 0.5%, not the 5.0% contained in the report.

The aftermath of the typo saw a surge in trading activity, with nearly 48 million Lyft shares changing hands in after-hours trading. This spike far exceeded the stock’s average daily trading volume.

Despite the typo, Lyft stock still posted its best-ever single day return, and the stock is up +26% so far in 2024.

While the spotlight was on Lyft this week with its earnings release error, over the years other companies have made notable earnings release blunders:

CrowdStrike – In 2019, CrowdStrike forecasted quarterly revenue off by a staggering $100 million due to a missing digit.

Galena – In 2016, Galena mistakenly left out the word “not” when attempting to tell the public that they “were not under investigation.”

U.S. Bancorp – In its 2022 annual report, US Bank had a typo that made it look like its loans had increased in value, when they had actually decreased. This error occurred amidst heightened investor scrutiny following the collapse of Silicon Valley Bank.

Biomatrix – In 1999, biotech company Biomatrix mistakenly reported lower inventory numbers during an earnings call, stating 23,000 instead of 32,000, leading to a 10% decrease in share price.

Source: WSJ
Source: NYPost

#4 – Sustainable Diamonds? – Touting sustainability, ethical reasons, and price, many younger brides and grooms are turning to lab-grown diamonds for their wedding rings.

Lab-grown diamonds cost a fraction of those formed naturally underground. In the US, lab-grown diamond sales increased 16% from 2022 to 2023 according to Edahn Golan, an industry analyst. Lab-grown diamonds are now 5% – 6% of the global diamond market.

Whether lab-grown or natural, diamonds are entirely made of carbon. Consumers may not be able to tell the difference, but experts can still distinguish between the two by using lasers to pinpoint telltale signs in atomic structure.

The premise of sustainability of lab grown diamonds has, however, has been called into question. Producing a lab-grown diamond takes an enormous amount of energy. Manufacturers, many of which are based in India and China, are not transparent about the sustainability of their operations. Adding to the confusion, manufacturing company websites can claim sustainability, or being environmentally friendly, without providing environmental impact reports or being certified by third parties.

More advanced companies can manufacture diamonds with renewable energy such as hydropower or have the emissions from diamond manufacturing offset with carbon credits. Paul Zimnisky, a diamond industry expert, said companies that are transparent about their supply chain and use of renewable energy “represent a very small portion of production.”

Haley Farlow, a 28-year-old teacher, and her fiancé have been designing her lab-grown diamond engagement ring from a reputable company, making her ring “more special and fulfilling.” “Most of my friends all have lab-grown. And I think it just fits our lifestyle and, you know, the economy and what we’re living through,” said Farlow.

Many lab-grown diamonds have cloudy sustainability claims | AP News

#5 – Paris Olympic Medal – Athletes who medal at this summer’s Paris Olympics will be taking home a little bit of France with them.

A hexagonal, polished piece of iron from the iconic Eiffel Tower is being embedded in each gold, silver and bronze medal that will be hung around athletes’ necks at this summer’s Olympic and Paralympic games.

The Eiffel Tower was built for the 1889 World’s Fair and was originally intended to stand for 20 years. Thanks to continual upkeep and care, the 135-year-old monument remains an impressive part of the Paris skyline.

Girders and other pieces of the tower that have been swapped out during renovations have been stored for safekeeping. Iron embedded in the center of the 2024 Olympic medals was cut from the preserved iron pieces, according to Joachim Roncin, head of design at the Paris Games organizing committee. “Having a piece of it is a piece of history,” he said.

The iron inlay is stamped with “Paris 2024” and the Games logo – which looks like a flame or the face of a woman with a chic bob haircut. The five Olympic rings and the Paralympic logo of the three swooshes are also stamped on the iron of the Olympic and Paralympic medals respectively. Around the iron pieces are disks of gold, silver or bronze, crinkled to reflect the light, making the medals shine. Games organizers say the metal is all recycled, not newly mined.

“Having a gold medal is already something incredible. But we wanted to add this French touch and we thought that the Eiffel Tower would be this cherry on the top,” said Roncin.