It appears all three major market indices will close higher for the third consecutive week. This time of the year is generally good for the markets as investors ride an optimistic wave into the end of the year. While this isn’t always the case (I’m looking at you 2018), it seems this year may hold true to form. Hope abounds for interest rate cuts, a soft economic landing, and the return of inflation to more normal levels. This is also a time when analysts begin making predictions for the coming year. Despite their confidence, understand they don’t know what’s going to happen any more than you do. There will always be a big helping of uncertainty when it comes to the economy, the stock market, and the potential for black swan events. I suggest you hold onto hope and optimism, and not be swayed too much by the talking heads, financial analysts, online and print publications, and least of all market celebrities who will undoubtedly insist they know what’s in store in 2024.
Let’s start with the best news this week. A government shutdown has been averted. Earlier this week the House passed a two-part stopgap plan to buy more time to pass a more permanent fiscal year 2024 budget. One swath of government will be funded through January 19, while the rest will be funded through February 2. The first deadline will apply to transportation, military construction, veteran’s benefits, housing, urban development, agriculture, the FDA, and energy and water programs. The second expiration pertains to the rest of the government, including defense. The Senate approved the bill on Wednesday, and today President Biden signed it. The hard work remains, but for now, we can enjoy Thanksgiving and Christmas without having to worry about a shutdown.
The second good piece of news we received this week is that headline inflation hit zero in October, while core inflation rose less than expected. The CPI indicated zero inflation month-over-month in October which was a surprise as many had expected a small uptick for the month. In large part, the fall in inflation was due to falling gasoline prices. On a year-over-year basis, CPI rose 3.2% compared to 3.7% prior. Core CPI, which excludes food and energy, rose 4.0% which was also slightly better than expected. I recognize that we’re not talking about deflation which I’m sure some of you would appreciate right about now. However, the pace of inflation is slowing and perhaps by the end of next year may be back to its historical range of around 2%. That’s the expectation on the street.
In company news, we learned that Amazon has partnered with Hyundai to begin offering cars on Amazon’s platform. Disruption is a hallmark of capitalism, and no company has been more disruptive than Amazon. Some even go so far as to say this will be the death of the local car lot. It plans to offer online vehicle sales beginning next year with buyers having the option to buy on Amazon’s website and then pick it up from their local dealer. As part of the deal, the “Alexa Built-in experience” is coming to Hyundai’s next-generation vehicles. Perhaps more intriguing is Exxon’s plan to invest $15B in Indonesian carbon capture projects. Additionally, the company has plans to become the leading producer of lithium, saying it has started work on the first phase of operations in Arkansas with a target of starting production in 2027. The fossil fuel industry recognizes things are changing and doesn’t plan on being left behind. While perhaps not as fast as some would prefer, the industry is slowly but surely pivoting as it eyes the future of energy consumption. If anyone can do it, I expect it will be the largest players in the industry.
In the retail space, we had two impactful but contradictory stories this week. Target reported earnings in which it saw its operating margin improve by a substantial amount. Gross margin grew by almost three percent in the year, which is significant. Among the reasons were fewer markdowns, lower freight costs, and a favorable category mix. On the flip side, we had Walmart and TJX Companies which poured cold water on the consumer story. Perhaps the latter are just trying to lower expectations with the hope of beating to the upside when they report next. It remains unclear for now, but it can’t be both strong sales and a weak consumer. Time will tell.
In closing, I turn to the topic of food which oddly seems to come up more than one would expect. It seems Italy has decided to ban the production and sale of lab-grown meat, in line with “the government’s efforts to defend the country’s traditional culinary culture.” It also bans the use of words like steak and salami to describe plant-based products. Agricultural minister, Francesco Lollobrigida (I swear I didn’t make up that name), said, “Italy is the first nation in the world to be safe from the social and economic risks of synthetic food.” As we think about the upcoming Thanksgiving feast, I wonder if there will ever be a place for plant-based turkey on our tables. I can’t imagine the gravy would be quite the same. Now you know.Bruce J. Mason, MBA