The markets look to break the recent span of higher finishes with a whimper this holiday-shortened week. You’ll remember I was shocked last week as investors disregarded the Federal Reserve’s statement that it plans on raising interest rates twice more before the end of the year. I recall saying last Friday that investors are calling Mr. Powell’s bluff. Apparently, I wasn’t the only one who was surprised by their reaction as Mr. Powell himself insisted in Congressional testimony this week that he was in fact serious about continuing to raise interest rates. The question was whether investors would double down on the bet or throw down their cards. As the week wore on it became clear they lost their nerve and folded. And with that, the markets drifted a bit lower to finish the week down.
I’ve been mostly upbeat for some time now as the markets have drifted ever higher. It is easy to get complacent when the party appears to have no end. And yet, valuations continue to climb higher as breadth remains tight. An analyst at Morgan Stanley was quoted this week as saying, markets have switched from fear to greed at an inopportune time. He pointed to concerns around “fading fiscal support, less liquidity, and the impact of inflation.” Adding to this theme, the yield curve has been inverted for over twelve months now and is in fact widening. The yield curve inversion reached a multi-decade record on Tuesday as the spread between the U.S. 10-Year Treasury yield and the U.S. 2-Year Treasury yield reached 97 basis points (almost 1%). This represents the widest gap the curve has experienced in more than 40 years, dating all the way back to 1981. These remain strange and difficult times for both investors and consumers. Enjoy the gains but recognize the events this year have been unexpected and in many ways abnormal.
In company news, Amazon announced its Prime Days will be July 11-12 this year. Analysts and economists will both be looking very closely at the results as they may indicate whether consumers have much gas left in the tank. In celebration of its twenty-fifth anniversary, Hasbro has announced the return of the interactive Furby. My daughter insists that when she was a child it would frighten her in the middle of the night talking gibberish while tucked away in her dresser. I guess another generation will get to experience the nightmares too. Speaking of scary developments, the U.S. Agriculture Department gave the green light to Upside Foods and Good Meat which could launch a new era of meat production aimed at eliminating harm to animals and drastically reduce the environmental impacts of grazing, growing feed, and animal waste. So, what’s this all about? Cultivated meat is typically grown in steel tanks, using cells that come from a living animal. With each passing year, I feel we’re getting closer to the image of the world the Jetsons envisioned 60 years ago.
This week was important for another reason. The White House hosted a State Dinner for the Indian Prime Minister as it tries to foster closer economic ties with India. As trade with China continues to be contentious, first under President Trump and now under the Biden administration, our economic interests appear to be diverging. In an attempt to “diversify” our trade partners, U.S. companies are now forging alliances in India that were unlikely just ten years ago. The Indian Prime Minister met with CEOs from Micron Technologies, Applied Materials, General Electric, Apple, Alphabet, Microsoft, Fed Ex, and Tesla. GE Aerospace signed a memorandum of understanding to produce fighter jet engines for the Indian Air Force. Applied Materials will invest $400M in a new engineering center, Micron may spend up to $2.75B in a new chip assembly facility, and Google is looking for suppliers capable of assembling its Pixel phone. Apple, which was an early mover, lists India as becoming its most important manufacturing base outside of China. In return, an Indian carrier ordered 220 planes from Boeing. Still, a sticking point is India’s exploitation of the war in Ukraine to buy cheap oil from Russia against U.S. and EU wishes. Russian oil accounts for about 40% of India’s crude imports. Additionally, India doesn’t fare much better than China when it comes to human rights.
In closing, I recently discovered John Singer Sargent, the American painter who lived in the second half of the 19th century. He was the preeminent portrait painter of his day, documenting the height of the gilded age. Here’s a brief account of his life. However, it was another artist that caught my attention this week as I learned a painting by Francis Bacon is being offered not for sale, but as an Initial Public Offering (IPO). The painting is entitled “Three Studies for a Portrait of George Dyer” and is expected to bring in $55 million with shares being offered at $100 per share. Trading is expected to begin in July and the portrait will then go on public display in a museum. The company that owns the painting, Artex, has big plans to float $1 billion worth of paintings over the next few months, with each individual work with its own IPO. Now you know.Bruce J. Mason, MBA