The markets look to close the week roughly where it started except for the NASDAQ which will finish down a bit. The inflation report added to the volatility this week as the data showed inflation remains a problem, particularly in certain segments of the market. This caused quite a tizzy with investors as they looked to the news as particularly concerning given their overly optimistic hope for the Fed to begin cutting rates soon. I don’t know how much more evidence investors need to realize that this last bit of inflation is going to be hard to squeeze out of the economy and may be with us longer than many anticipated. Fortunately, after taking a time out, investors came to their senses and dove right back into the markets pushing the indices back to where they started the week. Unfortunately, I don’t think this will be the last time the markets overreact to a piece of economic data.
Let’s take a minute to discuss the inflation report which caused so much consternation. The good news is that the Consumer Price Index (CPI) continues to fall, down from 3.4% in December to 3.1% in January. Depending on which media source you read or watch, this was either an indication of the best economy ever or for some a signal that the current situation remains untenable. Truth be told, it is a little of both. The fact that inflation continues to fall is a good sign. After all, it would be concerning if inflation suddenly and unexpectedly began to rise. On the other hand, if we look at the parts of the economy that continue to experience inflation, we find that things like food away from home (+5.1%), juice and drinks (+29%), baby food and formula (+8.7%), bread (+5.1%), sugar (+7.2%), vending machines (+10.6%), motor vehicle insurance (+20.6%), repair of household items (+18.2%), veterinary services (+9.6%), nonprescription drugs (+9.2%), and rent of primary residence (+6.1%) are all outpacing the reported rate of inflation. To put it another way, while wages continue to grow, the cost of things people purchase regularly is growing faster. And therein lies the incongruity as it relates to how people view the economy.
In company news, NVIDIA became the third most valuable U.S. company by market capitalization this week. It surpassed Alphabet with a market cap of $1.812 trillion. Yes, I had to double check that was in fact “T” as in trillion. Perhaps more astounding is that its market cap is up $600 billion or roughly one Tesla (the company not the car) in just the last two months. This comes as expectations surge for the AI semiconductor industry which is expected to grow to $119B in just the next few years. The company is due to report earnings next week.
As for the economy, we learned that while inflation continues to be a fixture, consumption may be starting to fall off. Retail sales fell -0.80% month-over-month to $700B in January, more than the -0.10% expected. After months of consumer spending surprising to the upside, perhaps the consumer is ready to take a break. It may be as simple as a holiday spending hangover and seasonal issues, but it is worth keeping an eye on. As if demonstrating the current state, banks reporting credit card delinquencies and net charge-off rates this week all reported worsening conditions, with the lone exception of Bank of America. Even Kraft Heinz stated in its earnings report that volume dropped in the fourth quarter as consumers pushed back on higher pricing. We may be nearing the tipping point.
In closing, I want to mention a story I came across this week that surprised me. Here’s a hypothetical question: Can one federal agency sue another federal agency? Apparently, the answer is yes. I learned the Internal Revenue Service (IRS) is suing the Federal Deposit Insurance Corporation (FDIC) over $1.45 billion in taxes owed by Silicon Valley Bank (SVB). While technically the FDIC is an independent agency, it was formed by Congress and is tightly regulated by Congress. So, if it looks like a duck and quacks like a duck… you know the saying. Anyway, the FDIC, which took control of SVB in March 2023 in the biggest bank failure since the 2008 financial crisis, has denied the claim. It should also be noted that the FDIC is locked in a dispute with SVB Financial, SVB’s former parent firm, amid efforts to recoup its cost in rescuing the failed bank. And in a truly peculiar turn of events, SVB Financial has sued the FDIC seeking to recover the over $1.93B seized by the regulator when it took over the lender. I’m not sure how much more convoluted this can become, but I don’t envy the judges overseeing these three cases. Now you know.