Weekly Market Update March 3, 2023
Dow Jones Industrial 33,391 +1.7%, S&P 500 4,046 +1.9%, Nasdaq Composite 11,689 +2.6%,
US Ten Year 3.96%, West Texas Intermediate $79.82
Equity markets finished the week higher following some notable earnings surprises (both positive and negative) and commentary from various Fed governors on their interest rate outlooks. On Monday, Union Pacific (UNP) finished the day up 10% after the company released solid numbers as well as a CEO succession plan long desired by shareholders. On Wednesday, Lowe’s (LOW) followed Home Depot’s lead and released disappointing numbers, finishing the day down 5.5%. On Thursday Salesforce (CRM) released better than expected numbers, highlighting eye opening operating margin guidance for 2024 of 27% vs street estimates of ~23%. Broadcom (AVGO) followed suit and issued upbeat guidance for the 1Q of next year and the stock finished the day +5.7%.
Also of note were comments from a couple of Fed Presidents mid-week. Minneapolis Fed President Kashkari said he’s leaning toward raising rates further, while Atlanta Fed President Bostic said he thinks the fed should get to a 5.0 – 5.25% terminal rate and hold there well into 2024, while also indicating he favors a 25bps hike in March. The S&P briefly fell below its 200-day moving average on Thursday (3,940), however the market soon found support and we ended the week above 4,000.
In an effort to steer the inflation conversation in a more interesting direction, I invite readers to play a quick game: Try and name the top 3 goods and services whose prices have risen the most since 2000. Specifically, which components of the CPI Index have “inflated” more than any other component? Then, try and name 3 goods and services that have risen the least or have fallen since 2000. In no particular order, the categories are:
New Cars, Household Furnishings, Housing, Clothing, Food and Beverage, Childcare, Cellphone Services, Software, College Textbooks, Televisions, College Tuitions and Fees, Medical Care Services, Toys, Hospital Services.
I’ll put the results a bit lower down so you can make your choices without peeking!
*Source: Bureau of Labor Statistics
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What does the chart tell us? Aside from the happy realization that buying a flat-screen TV has never been more affordable, the goods and services that are “outsourceable” to foreign suppliers saw price drops, while “non-outsourceable” categories saw massive price hikes. And unfortunately, the non-outsourceable categories like Hospital Services, College Tuition and fees, Medical Care Services and Childcare also happen to be the ones that impact nearly every American at some point.
The chart above also explains the reason for the U.S. dependence on foreign goods production (outsourcing). Putting aside the conversation around corporate profitability, the government has a vested interest in protecting the U.S. consumer by keeping prices affordable. This is one of the reasons why the supply-chain for cellphones, software and televisions has been shifted overseas for so many years. And until Covid and the resultant supply-chain issues that cropped up shortly thereafter, it made sense for the U.S. government to allow for overseas production, as it helped to alleviate some inflation of many widely used goods and services. In other words, shifting production to lower cost producers like China and Mexico is deflationary.
On the flip side, the massive inflation seen in Hospital Services, College Tuition and Books, and Medical Care Services highlights the challenge the Federal Reserve is facing: How to combat inflation without destroying the economy. Sam Ewing (for those baseball fans) once said, “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” The reality today is that inflation is much more dangerous than a bad haircut. Outside of non-essential goods, the rising prices in essential goods and services can negatively change the trajectory of every American’s life. This is why investors have become acutely aware of economic releases and Fed commentary. Inflation is a real threat – the Federal Reserve is navigating a very difficult task which will impact every American. Ronald Reagan once said “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” Politics aside, he hit that one right on the screws.
Have a Great Weekend,