Recalibrate

The first interest rate cut, since March 2020, is now behind us with more coming in the months ahead.  Fortunately, markets reacted well to the news, believing rate cuts would stimulate the economy and prevent the U.S. from going into a recession.  I say fortunately because it could just as easily have gone the other way, with investors fearing the worst given the abnormally large rate cut.  Regardless, both the Dow Jones Industrial Average and the S&P 500 logged new all-time highs this week, sending investors over the moon.

The Federal Reserve began publicizing interest-rate changes in 1994 and since has moved from a neutral stance to a cutting stance only six times.  In three of those instances, those being 1995, 1998, and 2019, it led to a cut of 25 basis points.  It began with deeper cuts only three times, in early 2001, 2007, and early 2020.  You may recognize those dates as the tech bubble, the Great Recession, and the pandemic.  This led people to believe that large rate cuts are reserved for more severe situations.  Listening closely to Jerome Powell, what we learned is that the Fed wants to recalibrate interest rates wholly separate from economic conditions.  He used the word recalibrate no less than ten times in his speech.  Despite saying it is data-dependent, the Fed now recognizes that tight financial conditions are doing damage to the economy.  This larger-than-normal rate cut signals that the Fed recognizes it is behind regarding rising unemployment and wants to get back to 3.5%, which it considers a neutral rate.  To do so, it plans on cutting rates two more times this year, and four times next year.

In company news, it was announced that Amazon expects its employees to return to the office five days a week going forward.  To the dismay of its workers, the work-from-home experiment is coming to an end.  I suspect this trend will continue in the months to come.  Target announced it was beginning its holiday hiring spree a bit earlier this year.  Just like Halloween and Thanksgiving decorations hitting shelves in August, Target plans on bringing on 100,000 seasonal workers earlier than usual.  Retailers are gearing up for a very competitive landscape as consumers are running out of steam.  And lastly, I came across the most head-scratching statement I’ve seen in a long time.  A UBS analyst stated that Under Armour should just sell less and charge more. “It is under-earning because it is overselling.”  Huh? I don’t know what MBA programs are putting out these days, but price and demand are delicately intertwined unless you’re talking about Veblen goods.  If it was just that simple, every company would be doing it.  I’ve now heard it all.

We haven’t discussed strikes in a while, but it appears they are now back on the bingo card.  One week ago, 33,000 union machinists at Boeing walked off the job.  Federal mediators joined talks, but union officials reported little progress was made.  To be clear, the union voted 96% in favor of a strike after rejecting a proposed contract that would have raised their pay by 25% over four years.  Workers wanted raises of 40% and a restoration of traditional pension benefits.  In similar news, the United Auto Workers union was back in the news as tensions grew between the union and Stellantis (previously Chrysler).  The union claims the automaker is not following through on guarantees it made during the labor deal that was inked last year.  Dramatically, CEO Carlos Tavares said, “We are beyond fear.  We cannot complain, we cannot hesitate, we have to concentrate our efforts to stay alive.”  The window for these types of strikes is slowly closing as leverage between worker and employer is starting to shift.  I hope it works out for all involved.

In closing, I turn to an article I came across that has me worried.  One in five Americans with student loans has never made a payment toward their debt.  The majority say they cannot make payments because of cost-of-living issues, and many are hopeful that loan forgiveness may be available in the future.  The downside is that their balances have been growing, especially now that interest has accrued for nearly a year now.  The endgame for many of these young adults hinges on President Biden’s SAVE plan which is currently tied up in the courts.  If it survives, approximately 4.5 million out of the 8 million borrowers will owe $0 per month.  Now you know. 

Bruce J. Mason, MBA