At the end of the day the economy is pretty elementary. Buyers exchange money (cash or credit) with sellers for goods, services, or financial assets. So sellers (companies) make money when buyers (mostly consumers - which represent 70% of GDP) pay them. Those sellers then pay other companies and people to both to produce their goods / services / financial assets (their cost of goods sold) and also further develop those goods / services / assets, market them, and sell them (their operating expenses). The capital allocation decisions by the sellers give buying power to other stakeholders, which supports the cycle in perpetuity. Voila, (a gross oversimplification of) the economy.
We can understand how the economy is performing via data - key economic indicators - which provide insight into exactly how much money is being exchanged for goods and how much companies are paying suppliers and people to produce, develop, market, and sell said goods. In March, the fear was pretty much all of these transactions would grind to halt because buyers weren’t spending and employees weren’t working. And as we know, Q1 GDP (total money spent on goods and services) fell 5% after just two weeks of COVID impact. And as we look forward to Q2 GDP (which will be announced this coming Thursday) forecasts are anticipating a 33% decline. On the surface it would appear we’re in a bad spot.
But earlier in July, Jordi Visser, CIO at Weiss Multi-Strategy Advisers held a webinar discussing key economic data and explaining where we really are it relates to the economy and business earnings. Visser noted lots of the narrative has been focused on negative points (i.e. non-durables like travel and hotels) while personal consumption of durables (real things, like fridges or recreational equipment) demonstrated violent spikes back upwards in May, making up their entire fall and rebounding in weeks vs. what took nearly a decade for certain categories post-Lehman. Yes, many areas of the economy took a significant hit but people were stuck at home, bored, and had time to replace the old fridge or get the kids a trampoline to keep them entertained during the day. Money is being exchanged in areas of the economy (and the supply of money in the economy is at record high levels) and consumers aren’t quite behaving like we’re in a recession.
So to parrot Visser, when the economy surprises on the upside company earnings are usually good (positive earnings revisions occur) and stocks trade higher. Since the economy has indeed surprised, the markets should keep trending up! This isn’t to say GDP won’t be bad, but remember that expectations are everything. The stock market is not the economy, but it does price in expectations for business performance based on economic trends, which are promising going forward.
Financial Resources
The Three Pillars of PLG
In 2014, OpenView led Datadog’s Series B for a few big reasons: they solved a pain point nearly universal among developers, delivered value to customers without any friction, and tended to grow rapidly inside an account after the initial adoption. The success of Datadog - now a $25B public company - coupled with the IPOs and continued performance of other PLG businesses like Zoom, Atlassian, Shopify and Twilio, makes it clear that PLG is here to stay. We’ve found ourselves answering the question “what is product led growth?” a lot over the last few years but in a new piece released this week, OpenView Partner Mackey Craven (with guest appearances from some of the CEOs of top product led companies) went one step further, explaining what makes PLG businesses so successful (and as we noted last week, more valuable): The Three Pillars of PLG!
Capital Markets Resources
Market Updates
Sports returned this week, which means sports betting has also returned. Naturally the markets closed down on Thursday as Robinhood traders sold off some positions for cash in order to make wagers on the first sporting event in months, a Yankees / Nationals game that night. Okay, we made that up but the NASDAQ did finish down 2.3% on Thursday and the game that night was in fact the most bet on game in baseball history, lending some credibility to the “retail traders are moving the market narrative” that has persisted for the last few months. At the end of the week the key indices that we track were all down (SaaS -1.57%, Dow -0.76%, NASDAQ -1.52%, S&P 500 -0.28%).
Economic Data
This week the headlines were all about worsening unemployment and continued US / China tensions. Next week the headlines will be about the July Fed (FOMC) meeting and as we noted, Q2 GDP. At a high level the economic story remains consistent - as BofA noted, “after a period of volatility…forecasts for growth have stabilized over the past few months…because we now have a better understanding of the feedback look between the virus, policy and the economy.”
What Else We’re Reading
The public SaaS companies we tracked closed last week trading for 11.6x 2020E revenues, versus 11.6x last week - it was a flat week in SaaS. Chanos: The Fundamental Short Seller and Golden Age of Fraud. Market Color: Jordi Visser. Matt Levine on SPACs. Where do Profits Come From? A Short History of Financial Markets.