Sustainability and the Olympics

The markets look to finish a little lower this week on renewed concerns over the newly named COVID-19 coronavirus.  Companies with exposure to China and Southeast Asia are beginning to revise earnings estimates downward, as might be expected, and investors aren’t too thrilled.  Among those companies include Procter & Gamble and Apple.  We should expect to see more companies make announcements in the coming weeks which will impact first quarter earnings.  However, as mentioned a few weeks ago, these types of pandemics historically peter out in six to eight weeks which means there should be a healthy rebound in earnings in the second quarter.  While the increased volatility and profit taking might not feel good, it should not be cause for alarm.  This too shall pass.

It is hard not to write about these negative events because they are the majority of what the media is reporting.  But let me try.  General Mills reported this week that it plans to drive cereal growth by offering innovation in taste, convenience, and health.  It plans on releasing new cereals including Blueberry Cheerios, GoodBelly probiotic cereal, and premium Morning Summit cereal that will be priced at $13 per box!  U.S. cereal sales were flat last year.  Maybe the $13 cereal will sell like hotcakes?  On the other hand, maybe they should just start selling hotcakes?

Okay.  I found one silver lining to the coronavirus.  On Wednesday, the S&P 500 briefly touched a new all-time high after China indicated it would provide some support to limit the economic damage caused by the coronavirus.  That’s good news, right?  The PBOC (People’s Bank of China) cut interest rates much like our Federal Reserve has been doing, and the Chinese government cut companies’ required pension contributions and insurance fees by more than $70 billion this year.  It looks like China recognizes the potential economic impact and is working to minimize the hit to its economy.

Worth noting, the yield curve inverted last summer which is never a good thing.  However, it forced the Fed to continue cutting interest rates, which had the intended effect of steepening the yield curve.  This week, again driven by fear, the yield curve came close to inverting once more.  Much like last summer, this will likely force the Fed’s hand in continuing to lower interest rates, despite its adamant stance that it wouldn’t.  Analysts and investors put the probability of a rate cut at 80% by the end of this year.  The challenge for the Fed is how to do this without looking biased during an election year.  This came up in a meeting I had this week with our Goldman Sachs rep, and he believes if the Fed cuts rates, it will be no later than June.  If they don’t act by then, the Fed may have to wait until December. 

In closing, let’s turn to something most of us look forward to.  In just over five months, the 2020 Summer Olympics will begin in Tokyo.  In recent years, the host cities have made an effort to become more eco-friendly.  2020 looks to be the culmination of this philosophy.  Starting in 2017, Japan began sourcing metals from recycled and used cell phones, laptops, handheld games, and cameras for medals.  Two years later, the public answered the call, as almost 79,000 tons of small electronic devices were collected.  In total, around 70 pounds of gold, 7,700 pounds of silver, and 4,850 pounds of bronze were recycled.  More recently, I heard about the beds in the Olympic village being made from recycled cardboard boxes. And just a couple weeks ago, I read that Nike, who is making the official uniform for the U.S. athletes, plans on using recycled polyester, nylon, and ground-up shoe parts.  It seems performance isn’t the only criteria these days.  Add sustainability to that list. Now you know.

Bruce J. Mason, MBA