Path to Interest Rate Cut Established
The markets headed higher this week as new data on inflation shows prices stabilizing and, in some cases, even falling. Furthermore, the Dow Jones Industrial Average soared to a new high on the back of gains in Home Depot as investors are beginning to embrace some stocks outside of the technology sector. While this may be the beginning of a market rotation out of technology and into other more neglected sectors, it is too soon to make that assertion with any certainty. However, we have been taking gains in many of the highest-flying positions to mitigate risk and ensure positions don’t grow too large as a percentage of the portfolios. We believe this is the right approach as we know sometimes momentum drives prices higher than is warranted.
As for what drove markets this week, investors were focused on inflation data. The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors typically look at core CPI, which excludes the food and energy components. In June, Core CPI was 3.3% higher than a year ago, down from 3.4% last month, and the lowest annual rate of increase since April 2021.
In company news, we must turn to Boeing. In 2010, the U.S. Supreme Court decided in Citizen’s United to expand the idea that companies are people and money is free speech. So, it comes with a bit of irony that in 2024, Boeing the company is looking for a way to keep its defense contracts after it pleaded guilty to criminal charges in two fatal crashes of its 737 Max plane. While the guilty plea could make the company ineligible for future government contracts, it is working closely with the U.S. Department of Defense to find a loophole solution to this problem. Defense work makes up approximately a third of Boeing’s revenue. While on the topic of planes, Delta Airlines announced that despite record travel and seven percent annual revenue growth, the company saw its total revenue per available seat mile down 1%. It seems that how a company is run does matter. In the aftermath of the pandemic, airlines expanded routes to accommodate pent-up travel demand. As the economy normalized, many of these new routes proved unprofitable. Despite higher fees and the record number of passengers, the company is in an unenviable position to make cuts or increase ticket prices once again.
Another facet of life that touches almost every adult is slowly becoming an issue for many. In recent years both auto and homeowners’ insurance have increased by double-digits, much like health insurance has in past decades. This week I read that State Farm has threatened to abandon California if it can’t raise prices by 52% on renters and 30% on homeowners. This is no laughing matter as State Farm is California’s largest insurer. Some insurers like Allstate and Farmers Direct have already limited coverage or stopped conducting business entirely in the state. Florida is seeing similar problems with more severe hurricane activity causing billions of dollars in liabilities for these companies. If that wasn’t enough, a recent study in the NY Times shows some parts of the country are subsidizing other parts regardless of risk. The bottom line is that some state regulators push back harder. It’s an interesting article, just don’t let your blood pressure get out of hand while reading it.
In closing, I return to food, one of my favorite topics. Several years ago, I shared the news on cultured meat. While I was skeptical about its adoption, I kept an open mind and tried grilling a few Beyond Meat burgers. I even went as far as giving the Impossible Whopper a try, once, at Burger King. Let’s just say I wasn’t wowed. Now I learn that Singapore has officially approved sixteen varieties of insects to eat as food. Among those are grubs, crickets, moth larvae, and one species of honeybee. Perhaps not such a surprise, the United Nations Food & Agriculture Organization (FAO) is promoting insect consumption as an environmentally friendly way to get protein in your diet. I know there are arguments against animal cruelty and the environmental impact of livestock, but much like plastic straws, there comes a time to draw a line. This is my line. I wish you and yours the best but am looking forward to some good ole’ fashion barbecue this weekend. Now you know.
Bruce J. Mason, MBA