Markets look to finish the week higher for the second consecutive week. While we’re not out of the woods, we can breathe a sigh of relief that, for now, investors are appeased by the tariff delay and are banking on a resolution in the months ahead. Secondarily, earnings announcements, while light on guidance, are about what was expected. If anything, investors appear willing to give companies a pass on the lack of clarity for the second quarter and remainder of the year. While I believe the economic data could weaken this summer if policies remain unchanged, the uncertainty remains high despite hope winning out over despair these past couple of weeks.
So, what is to account for the partial recovery we’ve experienced? A recent article I came across believes that retail investors that have come to the rescue. Often, you’ll hear the derogatory term “dumb money” to describe individuals who often invest based on emotion and not discipline. This group of investors is often the first to head for the exits at the initial sign of bad news. However, in a complete reversal, it is the professional investors who are harboring doubts and sitting on the sidelines. The thought is that “buying the dip” is the new norm for many investors, who appear to have internalized the idea that over the long-term, stocks typically go up. I’ve often said time in the market is more important than trying to time the market. While volatility will likely continue for a while longer, it is not unreasonable to believe that policies will be fine-tuned and eventually we’ll emerge from the current self-inflicted crisis a bit stronger.
Which brings us to earnings announcements. This week, 180 of the S&P 500 companies reported earnings with many of the largest tech companies among those reporting. As stated above, many of those came in as expected or even better, given lowered expectations. However, there are clouds on the horizon. Freight companies are warning that empty store shelves are coming. There is a steep drop-off in foreign-made goods entering the United States. Amid falling demand for China’s 145%-tariffed goods, cargo shipments from China to the U.S. fell 65% in the three weeks after the tariffs took effect in early April. The main entry point for Chinese goods, the Port of Los Angeles, expects a 33% drop in arrivals next week, with that number increasing over time. While I don’t anticipate a repeat of peak Covid supply chain interruptions, we could see a short supply of goods with a corresponding increase in prices. Also worth noting, the lag effect could be layoffs in trucking, logistics, and retail. It also raises the question of Christmas, as retailers typically place orders for delivery in the fall about now. This impact is yet to be determined.
As for the economic data, Q1 GDP was released on Wednesday, and while it was negative, it was not a surprise. Ordinarily, the market would have reacted sharply to a negative GDP report, but as imports were pulled forward in the first quarter, analysts had warned that the trade imbalance would create an unusual situation. As reported, Q1 GDP was -0.30%, versus 2.4% in the fourth quarter. What confounds economists is that people are still spending money, despite consumer sentiment dropping. Some believe it could be because consumers, fearing inflation, pulled forward big-ticket purchases like cars. Also, baffling economists is the data showing the Fed’s preferred measure of inflation, the personal consumption expenditure (PCE), grew only 2.3% y/y in the month of March, down from 2.5% in February. This creates a sticky situation for the Federal Reserve, which meets next week to discuss whether to cut interest rates or wait for further data.
In closing, I turn to what I warmly remember as a staple growing up. Chef Boyardee made news this week when it’s owner, Conagra, reported its sale to a private equity firm for $600 million. Due to my bout with nostalgia, I looked up the history of this fine canned pasta and discovered it began with an Italian immigrant named Ettore Boiardi in Cleveland in 1924. His pasta sauce was so popular, he began canning and distributing it nationwide under the name Chef Boyardee. The brand gained prominence during WWII, producing rations for the military and, was eventually sold to American Home Products for $6 million in 1946. Despite Eat This, Not That! calling many of Chef Boyardee’s products among the unhealthiest canned pasta you should never eat, it will remain a fond memory of my childhood. Now you know.
Bruce J. Mason, MBA
