The markets bounced back this week as investor fatigue seems to have run its course. Inflation has not been fixed. Neither has the conflict in Ukraine. Supply chain issues persist with a renewed fear of COVID in China and Europe as cases are on the rise. And yet the markets all rose this week with the tech heavy Nasdaq winning by a large margin. Energy, particularly oil, fell this week as if the sanctions are over. Admittedly, the indices were oversold in the short-run, however, many of the fears and uncertainties that drove markets lower remain. Time will tell if last week was the bottom, or whether this week was just a reprieve before act two begins.
One thing that we can be certain about is the Federal Reserve’s resolve to raise interest rates. This week Jerome Powell announced a 0.25% interest rate hike which was long overdue and by some accounts too small an increase. Additionally, the Fed now believes it will raise rates a total of seven times this year, as opposed to the three they had previously stated. By June, Mr. Powell believes the Fed will be ready to present how it plans on reducing its $9 trillion balance sheet, and we should have a better handle on economic growth and inflation for the remainder of the year. Having said that, some economists are less sanguine about the economy, particularly in 2023. There is precedent for the Fed to begin raising rates, only to reverse course prematurely when the economic data takes a turn unexpectedly. While I’m not saying it will happen this time, it wouldn’t necessarily surprise me nonetheless.
Among those economists that are somewhat less optimistic are those who suggest we could be setting up for stagflation. You might remember Mohamed El-Erian mentioned this scenario about a year ago and I took issue with his assessment. Well, as it turns out he might end up being right but for the wrong reasons. In a recent survey, 62% of fund managers who manage more than $1 trillion expect a combination of high inflation and slow growth, up from 30% in February. What Mohamed couldn’t have known was the war in Ukraine, the economic sanctions against Russia, and the rapid and dramatic increase in the price of oil and gas. He may end up being right but quite by accident. Unless, he works deep undercover for the CIA or is a time traveler?
In company news, we learned Starbucks is going greener. One of its plans is to reduce its reliance on disposable cups. It is undertaking 20 different tests across eight markets to figure out the best way to ditch the single-use cup. They will test financial incentives for reusable mugs, a borrow-a-cup program, and washing stations for people to bring in their personal cups. Additionally, it is testing a program that replaces its plastic lids with a paper version. It sometimes feels like these companies do things regardless of the actual environmental impact. I guess if it makes people feel better it can’t hurt. However, I draw the line at paper straws. In other company news, Tesla announced it is not immune from inflation and will be hiking the price of its cars. For the second time in less than a week, Tesla is raising prices in the U.S. and China to cope with the cost of raw materials. It’s cheapest vehicle, the Model 3 rear-wheel-drive, will now cost $46,990. So much for the $30K EV.
In the strangest story of the week, Senator Elizabeth Warren introduced a bill to block mergers worth more than $5 billion. The legislation would enable the deals to be blocked by the Department of Justice without needed to go to court. The bill called the “Prohibiting Anticompetitive Mergers Act” would also allow the regulators to retroactively reverse mergers if they lead down the road to greater than 50% market share or “materially harm” workers, consumers, or small businesses. While it doesn’t appear this bill has the votes to pass, this is just the latest in a long list of proposals aimed at slowing the growth of large companies.
In closing, if you are a basketball fan this one is for you. March Madness is here, but the real madness is believing you have a chance in filling out a perfect bracket. The odds of a perfect bracket are 1 in 9.2 quintillion if you were to pick each of the 63 games via a coin flip. If you know something about basketball, the odds improve to 1 in 120.2 billion. I wish you all the best. Now you know.
Bruce J. Mason, MBA