"You Can Want Whatever You Want"

The indices continued to eke out further gains this week despite earnings announcements that were somewhat lackluster.  While we’re only at the start of earnings announcements, it is becoming clear that companies want to reset expectations for growth in the coming year.  And to clarify, that means slowing growth not accelerating growth.  Perhaps this shouldn’t come as a surprise as the economy continues to slow in the face of higher interest rates and presumably tighter fiscal policy ahead.  Yet the resilience of the economy should not be underestimated.  While companies are preparing investors for the worst, it is quite possible that the year ends up quite a bit better than is currently being forecast.

The big news for the week was announced yesterday when we learned that U.S. GDP rose 3.3% in the fourth quarter which was well above the 2.0% expectation.  Many wrongly believe the economy is slowing much faster than it is and this leads some investors to believe the Fed will begin lowering interest rates sooner rather than later.  This quarter’s growth reflected increases in consumer spending, exports, state and local government spending, nonresidential fixed investment, federal government spending, private inventory investment, and residential investment.  In other words, consumers, businesses, and the government were spending during the quarter.

As for earnings announcements, I am not surprised companies are trying to lower expectations.  To be fair, many are experiencing modest revenue growth on an order of 0-2% annually in 2023 (excluding tech companies).  In contrast, they are reporting solid earnings growth on the back of cost-cutting and productivity gains.  Many of these companies realize that the ability to simply raise prices to generate growth is coming to an end as consumers are finding it harder to make ends meet.  Two examples of this are Tesla and Intel.  Both companies explicitly stated that investors should expect surprisingly little revenue growth in the coming year.  In both cases, investors reacted negatively to the news.  Additionally, Humana announced that Medicare Advantage medical costs are skyrocketing as customers are electing to have procedures that they may have put off during the pandemic.  Humana too was punished on the news.  While it isn’t the end of the world, we should recognize we’re transitioning to a slower growth environment, hence a slowing albeit resilient U.S. economy.

Switching gears, let’s talk about some interesting company news that was reported this week.  I had mentioned that Starbucks was expanding in India, and this week we learned Coca-Cola is making a sizable investment in the country.  Perhaps India is the next China after all.  Apple announced it has scaled back its EV car program again with a possible car now appearing in 2028.  I feel for any CEO that follows in the footsteps of Steve Jobs.  Tim Cook is a wonderful leader but perhaps not the visionary that his predecessor was.  I don’t know if this qualifies as visionary, but Chipotle announced new benefits aimed at Gen Z which account for 73% of its employees.  Among those are mental health benefits including up to six sessions with a therapist, as well as resources and tools aimed at health and wellbeing.  And in a reversal, Amazon announced it will no longer be cooperating with law enforcement who want footage from Ring doorbells.  They will now have to present Amazon with a warrant like in the good ole days.

In closing, I came across a story today that caught my attention.  Whether you like California or not, it often creates policies that change the dynamics for everyone.  A new bill in the California Senate would require all vehicles sold in the state beginning in 2027 to be equipped with speed governors to limit how fast you can go.  The proposal is part of a package of bills that hopes to reduce traffic injuries and deaths.  The senator who proposed the bill says, “You can want whatever you want. But that doesn’t mean you’re allowed to do it and that doesn’t mean you should be physically able to do it."  Before you say, well that’s California, know that the European Union has instituted a similar policy starting in July.  While the senator acknowledged there would be pushback, he noted that every car safety requirement has run into some degree of opposition when proposed, before becoming a given. Wiener cited requirements for seat belts, child car seats, and motorcycle helmets as examples.  I don’t know if I’d categorize control over my automobile in the same category, but there is a growing push to make us all safer by taking control away from drivers.  Now you know. 

Bruce J. Mason, MBA