Breaking up with James Bond
The markets ended decidedly lower this week as economists, analysts, and investors continue to struggle with the changing landscape. Tariffs continued to drive headline news as the on-again, off-again status drives ambiguity and uncertainty higher. Additionally, we are beginning to see the potential response from our trading partners as China, Canada, and Mexico have all stated they will seek tariffs on U.S. goods coming into their respective countries. Considering this uncertainty, consumers are beginning to show signs of fatigue and have slowed spending in recent weeks. At this point, it is reasonable to assume that first quarter economic growth will slow. The magnitude of the slowdown is yet to be determined.
Hampering sentiment further is a weakening jobs environment. The ADP National Employment Report showed private payroll growth slowed in February, adding only 77,000 jobs. Economists had expected 145,000 and was below the prior month’s reading of 186,000. Today we learned the U.S. non-farm payroll report added 151,000 jobs last month, which was also below expectations with a subsequent increase to unemployment from 4.0% to 4.1%. The slowdown in hiring likely reflects a combination of policy uncertainty and signs of slowing economic growth, potentially leading business owners to delay hiring plans. As for job losses, U.S. employers shed 172,000 jobs in February, up from 50,000 in January. It is believed that 62,000 of those job losses were cuts by the federal government. And while job growth is slowing, initial jobless claims seem to remain steady around 221,000.
What is working this year is diversification. With market volatility picking up and headline news sparking fear, it is understandable to believe that everything is doing poorly. The Mag 7 has become the “Lag 7” as the technology sector is the worst performing sector year-to-date, down approximately 7.5%. On the other hand, the sectors that are doing well include healthcare, consumer staples, materials, and real estate up 7.22%, 7.88%, 5.26%, and 3.13% respectively. That’s not to say returns have been great. For the year, the Dow Jones Industrial Average is mostly flat, with the S&P 500 and the Nasdaq down 2% and 5.75% respectively. As noted previously, it is completely normal for market pullbacks of 5-10% at least once if not more in any given year. What we are experiencing is not currently due to an expectation of a recession or the beginning of a bear market. Many believe the U.S. economy is still headed for a soft landing. We can chalk up the volatility to headline news and policy uncertainty.
In company news, we learned this week that Taiwan Semiconductor (TSM) is looking to invest $100 billion in the U.S. on the heals of Apple’s $500 billion announcement last week. TSM is the world’s largest chipmaker, and this announcement comes on top of an existing $65 billion investment commitment from 2020 to 2024, which is supporting the construction of three semiconductor fabrication facilities in Arizona. Previous commitments were for production of less sophisticated chips. The week’s announcement is for three additional chip fabrication plants including its most advanced chips. The Inflation Reduction Act of 2022, which had little to do with inflation, sparked an onshoring subsidized by government grants paid for by taxpayers. This started the ball rolling with companies like Intel announcing capital investment as close as Columbus Ohio. However, this latest round of deals is even better as it comes without taxpayer money attached. In many cases it simply makes sense to manufacture in the U.S. as it represents the largest market share of sales. I’ll pose a question to you, where do you think the largest BMW plant is located? If you said Germany, think again. It’s in Spartanburg, South Carolina.
In closing, I turn to 007. Yes, that 007… James Bond. The movie franchise has been around since Dr. No first debuted in 1962, over a half century ago. I won’t get into who the best James Bond actor has been, although it clearly is Roger Moore. Over its fascinating run, the one constant has been the Broccoli family, the owners of the franchise and the creative force behind the series. However, times are changing, and I don’t just mean Daniel Craig stepping down as 007. Amazon bought rights to the 007 IP back in 2022 when it purchased MGM Studios for $8.5 billion. The twist is that the Broccoli family has relinquished its role with Amazon now taking full creative control of the franchise. We can only guess where they take things, but if the Lord of the Rings prequel, The Rings of Power is any indication, we may have seen the last an icon. Now you know.
Bruce J. Mason, MBA