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Egg Heist Yet to be Cracked

For the second consecutive week, markets drifted lower as threats of tariffs compounded last week’s drama in the tech sector over DeepSeek.  As was expected, uncertainty has returned and is giving investors a reason to temporarily hit the pause button.  Earnings announcements remain strong with forward guidance, mostly upbeat.  However, uncertainty has a way of undermining both data and analysis as it speaks to the emotional side of investing.  With uncertainty comes fear and, understandably, a desire to seek protection.  In light of this, we are seeing some profit-taking, which is natural given the rise in stocks over the past couple of years.  We don’t anticipate this dynamic to stay for long but understand that markets' long-term goals sometimes succumb to short-term emotions.  We remain optimistic about the future, despite the current bout of uncertainty, and steadfast in achieving your long-term goals.

In case you need to be reminded, the week started off with an executive order imposing 25% tariffs on Canada and Mexico and an additional 10% tariff on China under the International Economic Emergency Powers Act.  Fortunately, within a day of signing the executive order, President Trump agreed to delay the 25% tariffs against Mexico and Canada for one month, which soothed investors frayed nerves.  The tariffs on goods from the three countries account for 40% of U.S. imports and would have impacted nearly 5% of U.S. GDP.  While this sounds like a big number, Canada’s and Mexico’s imports account for 64% and 74% respectively.  This gives the U.S. leverage in trade negotiations over the next month.  Let’s hope that they reach a mutually beneficial agreement in that time.

From an economic perspective, we learned this week that ISM Manufacturing PMI rose to its highest level since September 2022.  This economic data point is a measure of the health of the U.S. manufacturing sector.  Readings above 50 indicate manufacturing activity is expanding, while readings below 50 indicate contraction.  Yesterday’s reading of 50.9 snapped 26 consecutive months of contraction.  Elevated interest rates and higher prices have weighed on activity in the manufacturing sector over the past several years.  Encouragingly, the new orders component of the index surged to 55.1, the highest reading since May 2022 and signaling a pickup in demand.

Additionally, while job growth slowed slightly in January, prior months were revised significantly higher.  January nonfarm payrolls grew by 143,000, missing estimates for 170,000.  However, November and December were revised higher by 100,000, pushing the unemployment rate down to 4.0%.  The upshot is that the labor market remains healthy, which is positive for the economy and corporate profits.  For now, the urgency for the Fed to cut interest rates has diminished.

And lastly, corporate earnings are off to a solid start.  With 62% of the S&P 500 companies reporting quarterly earnings, 77% have beaten analysts estimates.  One example of this is Amazon, which, for the first time ever, passed Walmart in quarterly revenue.  The online retailer reeled in $187.8B, exceeding the $180B that Walmart is expected to report in two weeks.  Walmart has held on to its title as the number one revenue-generating company in the world for the last 12 years, though Amazon has a higher market cap ($2.5 trillion) than Walmart ($826 billion) since 2015.  But before we dethrone Walmart, a good portion of Amazon’s revenue comes from areas outside retail, such as Amazon Web Services (AWS) and digital ad services.  One takeaway is that the two are learning from each other, which is a sign of good management.

In closing, if you have baked a cake or made an omelet lately, you may have noticed the price of eggs are unusually high.  We often talk about the price of gas or perhaps the rising cost of beef, but I can’t ever remember mentioning eggs.  Well, on Wednesday, we learned of the heist of 100,000 eggs from the back of a trailer in Pennsylvania.  Seems it has become a bit of a whodunit that police have yet to crack.  Bird flu is forcing farmers to kill millions of chickens per month, pushing U.S. egg prices to more than double their cost in the summer of 2023.  The Agriculture Department predicts prices could go up another 20% this year as the average price nationwide hits $4.15 (in December).  If you happen to have “a guy,” please feel free to drop me a note.  At this rate, my wife’s penchant for eggs will soon require a home equity line of credit.  Now you know. 

Bruce J. Mason, MBA