The markets clawed higher this week despite a continuation of volatility and the occasional market overreaction. Every day this week, we saw one or more large companies down 5-10% on an earnings announcement that included bad news about supply chain issues, cost pressures, or reduced forward guidance. The reality is all companies will be affected to one degree or another by all three of these issues into the end of this year. We consider these issues mostly temporary, albeit with some lingering longer than others. The fact is, the economic landscape is more uncertain now than it was much of last year. And despite our best intentions, the solutions may be contributing more to the problems than solving them. Ultimately, the Federal Reserve is in the unenviable position of figuring out whether to tackle inflation or continue to work toward full employment.
The big news this week was the apparent resolution to the Build Back Better (BBB) bill that has been in the works for many months now. I say seemingly resolved, because there could still be some holdouts among progressives in the House. However, what we know is as follows. The bill will help cut child poverty, reduce child-care and health care expenses by thousands of dollars a year for families, enroll more children in pre-K, provide more people with health insurance, finance the building of one million affordable housing units, and slow climate change by reducing greenhouse gases. Before you get too excited, it will come at a cost of $1.75 trillion dollars which has some questioning whether the benefits outweigh the costs. And before you see this as a Democrat/Republican divide, it has some among the far left questioning the value as well. I’ve often heard the aphorism, don’t let the perfect be the enemy of the good. I don’t think anybody will argue this bill is perfect. However, is it good?
In other news, Facebook announced it will be changing its name to Meta. If you’re wondering what that means, it seems the new corporate goal will be to create a metaverse which is an “embodied internet where people can interact in immersive, 3D and shared digital worlds.” Sounds somewhat dystopian to me, but what do I know? The rebranding comes at a time when the social network is under significant regulatory pressure. In a way, it is following in the steps of Google which rebranded as Alphabet back in 2015. Meta wants to be known for more than social media and a separate parent name could put Facebook under a larger umbrella, along with Instagram, WhatsApp, and Oculus. The name change is effective immediately, but the stock will begin trading under the new ticker symbol MVRS on December 1st.
As was expected, Gross Domestic Product (GDP) in the third quarter came in considerably slower than in previous quarters. Supply chain problems were on full display as GDP expanded at an inflation-adjusted 2% annual rate in Q3, slowing from a 6.7% pace in the previous quarter and below the 2.7% consensus. Meanwhile, the pace of core inflation, the Fed’s preferred gauge, moderated somewhat, decelerating to 4.5% from the 6.1% increase seen in the second quarter. Growth in the third quarter was hit by a resurgence in COVID infections, which led to additional labor shortages, factory shutdowns and supply bottlenecks. But it was also impacted by catalysts like government stimulus, business reopenings, and vaccination campaigns which also faded this past quarter. CEOs were not as sanguine. 3M CEO said, “We don’t see the raw materials or the inflation environment slowing down in any way.” General Electric’s CFO said, “Next year we anticipate a more challenging inflation environment.” The CEO of Sherwin Williams said, “On the cost side of the equation, we do not see any meaningful improvement until well into 2022,” while Kimberly-Clark’s CFO announced, “I think the headwinds and the increased distribution costs will certainly be with us into 2022.” These are unprecedented times. I don’t know how many times I’ve said that over the past decade.
In closing, I bring to you a rather serious dilemma. With Facebook changing its name to Meta, what do we do with the acronym FAANG which stood for the fastest growing group of technology companies including, Facebook, Apple, Amazon, Netflix, and Google? The obvious choices are, MANGA or MAGMA. If we replace Netflix with Microsoft, which is now the largest company by market cap, we have GAMMA. If we swap Google to Alphabet, and add both Tesla and Nvidia, we get ANTMAN. And one last person suggested a Muppet themed MANAMANA. Now you know.
Bruce J. Mason, MBA