The markets drifted higher this week on good earnings announcements mainly from the largest technology companies. There are too many companies to name but know that many companies are beating estimates and lowering guidance. Those companies with larger-than-expected gains or the least negative forward guidance saw big spikes this week. Those that beat but aimed to lower investor expectations saw quite the opposite. This is quite normal during the earnings season and often is not indicative of how the rest of the quarter plays out. Our eye remains on economic conditions and data, and to that end, the economy is beating expectations on all fronts.
The big news this week was the announcement by the Federal Reserve that it plans on holding interest rates steady for the foreseeable future. Remember the mantra, higher for longer? Since the beginning of the year, I have cautioned that investors are too optimistic that interest rate cuts were on hand. Jerome Powell threw cold water on that idea when he said not only did they not decide to cut rates at the current meeting, but that is unlikely they’d cut rates at the next meeting in March. Markets sold off on the news as would be expected. Those who believe there will be six or seven rate cuts this year will be disappointed. The most likely scenario will be for half the number coming in June, September, and December. And if I’m being honest, the June rate cut is iffy. Lest not we forget, the presidential election in November will cause the Federal Reserve to pause in the months prior to the election so as not to appear to be influencing voters.
In company news, we learned that UPS is planning on reducing its workforce by 12,000 employees due to rising labor costs and slowing demand. We also learned that Intel, which announced back in early 2022 the construction of a $20B chip manufacturing facility in Ohio, will be delaying this project. The Wall Street Journal reported on Saturday that the Biden administration is expected to award billions of dollars in subsidies to Intel and Taiwan Semiconductor in the coming weeks. Some suggest the delays are due to the timing of the government subsidies, while others believe that there is excess capacity, and these facilities are currently unnecessary. And lastly, Neuralink, another of Elon Musk’s companies, announced it has implanted its brain-computer interface in its first human trial. The aim is to help people with traumatic injuries like paralysis, and possibly hearing and vision loss in the future. However, Elon’s long-term stated goal is to eventually merge humans with artificial intelligence.
For some less scary news, the University of Michigan Consumer Sentiment Index rose in January hitting the highest reading since July 2021. Confirming this reading was the Conference Board whose Consumer Confidence Index also hit a new two-year high. I am conflicted by these indexes because it feels very much like a chicken and egg question. Is confidence good because the economy is good, or is the economy good because sentiment is good? I suppose there is no answer, although my belief is that sentiment trails the economy not the other way around. Either way, it does suggest that no matter how hard the news wants us to feel bad about everything, it doesn’t appear to be working. And perhaps partly responsible for the upbeat mood is the job growth that is exceeding every expectation. Today it was announced that 355,000 jobs were created in January, which eclipses the 175,000 jobs expected. This data further points to no immediate interest rate cuts.
In closing, I return to a story I broke last year. You may recall the public outcry when a commissioner with the U.S. Consumer Product Safety Commission said in an interview that gas stoves were a health hazard. As a result, some municipalities, including New York and Los Angeles passed restrictions on using natural gas in newly built homes. Rest easy, the Department of Energy issued new energy efficiency standards and notably says gas stoves with high-powered burners, and oversized cast-iron grates are just fine. It even went a step further stating these appliances will reduce household utility costs while improving appliance’s reliability and performance. The good news is that 97% of today’s gas stoves already meet the new efficiency standards, although 23% of smooth top electric stoves fall short. Now you know.Bruce J. Mason, MBA