What a week. The month of September is certainly not disappointing as it continues its reign as the worst month of the year. All three major indices finished decidedly lower in large part due to comments from the Federal Reserve. The early part of the year saw the markets skyrocket but gave way to what I called no-man’s land from late spring into the summer due to a dearth of catalysts and a Federal Reserve that created a great deal of uncertainty regarding interest rates. With Fall now upon us, we’re in full pumpkin mode. That’s to say, the headwinds are becoming clearer, as is the slowing of the economy. The lag of interest rate hikes is finally showing up in the data.
Let’s start with the Federal Reserve since that’s the headline story this week. As was expected, the FOMC meeting resulted in a further pause regarding interest rates. The Fed’s minutes show a board unanimous in its belief that the economy hasn’t slowed enough yet. Its statement includes very clear language to the effect that the Fed may raise rates once more before the end of the year (as they had hinted at earlier, and I have written about). More importantly, the dot-plot which shows where the Fed thinks rates will be next year has tightened with one fewer rate cut on the horizon in 2024. This spooked the markets into believing the “soft landing” everyone has been talking about may be a mirage after all. To be fair, I do not believe the Fed will raise rates further, but simply talking about it may have the same effect. As for next year, the Fed doesn’t know any more than I do. They will remain data-dependent and their policy will shift as the economic conditions warrant. Regardless, the markets showed its displeasure by having a minor tantrum this week.
Additionally, the government shutdown I mentioned last week looks even more likely this week. Speaker of the House, Kevin McCarthy, failed in his third attempt to reconcile the moderate and conservative factions of his party. With our national debt just crossing $33 trillion, it seems the ammunition is on the side of the Freedom Caucus. Expect late-night negotiations and dire prognostications next week as Congress battles over this appropriation bill. But remember, as I mentioned last week, this is not the fiscal cliff we faced earlier this year, and the resolution, regardless of how long the shutdown persists, will not likely have a big impact on markets if history is any indication.
With regard to the various strikes occurring across the nation, it appears both the UAW and the writer’s and actor’s guilds are closer to reaching an agreement. While the SAG-AFTRA strike is important to our fall entertainment, it is the UAW that poses the bigger risk to the economy. Increasing its leverage, the UAW expanded its strike today to include 38 parts and distribution facilities across 20 states. The expansion affects both General Motors and Stellantis, but not Ford. Apparently, the UAW believes Ford is negotiating in good faith and seriously trying to bridge the gap. The bottom line is that they are moving closer but are not close enough yet.
As for company news, there were a couple tidbits I want to relay. Amazon announced today it plans on adding limited ads to its Prime service. I’m not sure how this might work, but presumably, ads will begin when one sits down to watch a movie or TV show on Amazon Prime. And while the company didn’t say this, I’m sure that for only $5.99 per month, you will be able to get an ad-free tier. Who wants to bet? I mentioned Walmart last week with its trial police station in a store concept. This week we learned the company is taking a foray into pet service. Now this is something I can get behind. While I love our vet, it never fails to amaze me that any time we bring one of our pets in, it costs no less than $300. Walmart is looking to offer basic checkups, grooming, and nail clipping services. I’m sold on this. And lastly, it seems McDonald’s may have reached peak pricing power as it is now looking to raise royalty fees on its franchisees. I don’t know what this says about the economy, but when it can no longer stick it to consumers, its only recourse is to stick it to the franchise holders. The royalty fees are increasing from 4% to 5% for new franchises.
In closing, I want to take a minute to return to the Walmart store and in-store police stations. Another approach was reported this week which is both disturbing and novel. A new company called Density says it has a solution to retail theft. They have a device that emits a dense cloud that can fill a store in seconds, effectively disorienting would-be criminals (and presumably innocent shoppers). The chemicals are harmless and the cloud dissipates after about an hour. The company states, “The Density Security Fogger is effective at stopping roughly 97% of burglary loss.” Before you think this is a crazy idea, and you’re not wrong, the company said that the technology has been so successful in the UK that thieves are now targeting stores without it. Now you know.Bruce J. Mason, MBA