Sri Lanka Goes Bananas

I am not going to lie.  It was a rough week for the market as consumer sentiment dropped, Walmart suggested a weakening consumer, and the Department of Justice announced it is investigating UnitedHealth Group over Medicare billing.  Couple these events with rising uncertainty over tariffs, the Middle East, Ukraine, and mass government layoffs on a weekly if not daily basis and we have the perfect storm.  Despite fear taking hold, corporate earnings and private sector employment appear unchanged for now.  That’s not to say that things couldn’t change in the coming months, but the data does not suggest economic weakness yet.  As investors, times like these may not feel great but rest assured it isn’t the first time, nor will it be the last time we’re faced with the unknown.  Investing is for the long run.

Let’s start with the elephant in the room.  Whether you like Walmart or not, it represents the buying habits of America.  With the rise in inflation, consumers flocked to Walmart for everything from groceries to clothing, looking for good deals on all manner of essentials.  So, when management reported this week that sales and profit growth will slow in 2025, like the old EF Hutton ad, people listened.  As the largest retailer in the U.S. and a bellwether for consumer spending, its projected slowdown is a signal for the rest of the retail industry that 2025 could be a rockier year.

In addition to Walmart’s warning, we also learned that the University of Michigan Consumer Sentiment Index fell 10% in February to a 15-month low.  The index fell from January’s reading of 71.7 to 64.7, the lowest point since November 2023 and below economist’s expectations.  Explaining the drop in sentiment is that households expect inflation over the next year to rise to 4.3%.  Remember, the Federal Reserve has stated 2% as its inflation target with headline inflation currently at 3.0% and core inflation (ex-food and energy) higher at 3.3%.  The thing about uncertainty is that it doesn’t just affect consumers.  It affects businesses too as they try and figure out capital outlays, manufacturing expansion, and uncertainties around importing finished products.  It seems no one, including businesses, likes uncertainty.

And lastly, today we learned that the Department of Justice (DOJ) has started an investigation into UnitedHealth Group which almost certainly will have a knock-on effect on others in the health insurance industry.  More specifically, the DOJ is investigating UnitedHealth’s Medicare billing practices that trigger extra payments to its Medicare Advantage plans.  The scope of this issue could be extraordinarily large as nearly half of the 65 million people covered by Medicare are enrolled in Medicare Advantage plans.  At this point it is unknown and hard to quantify the ultimate impact on the insurer’s profitability, but it explains the selloff today.  Other companies that could be affected include Humana, CVS Health, Clover Health, and Alignment Healthcare.

Before you delete this week’s email, there is some good news.  In the first two months of the year stocks have had to absorb news about increasing AI competition, tariff announcements, and a hotter-than-expected CPI (consumer price index) that is keeping the Federal Reserve on hold.  Despite these headwinds, most indexes are not far off their all-time highs, supported by positive economic and corporate fundamentals.  The S&P 500 is on track for its highest quarterly earnings increase in three years, with profits growing 17% from a year ago compared with expectations for 12% growth.  It is also encouraging that more companies are achieving strong results in addition to the mega-cap tech companies.  Like I said at the start, the fundamentals remain strong (for now).  While the markets are generally forward looking, it appears a lot of emotion is driving recent moves.

And in closing, I turn to the “things could be worse” story of the week.  At least we don’t live in Sri Lanka.  In recent years, monkeys have become an increasing problem due to their booming numbers.  There are thought to be between 2-3 million toque macaque monkeys on the island.  Last week one such monkey encountered a grid transformer causing total chaos as the entire electric grid went offline.  Engineers scrambled to restore power to the island’s 22 million people, leaving many sweltering in 86-degree heat.  While no official announcement was made on the fate of the monkey, power was eventually restored.  In any event, I guess we can be happy we don’t live in Sri Lanka.  Now you know. 

Bruce J. Mason, MBA