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Bouncing From Crisis to Crisis

Uncertainty is the word of the week and perhaps the challenge of the month.  Between heightened tensions in Israel and a Federal Reserve on the precipice of going too far in slowing the economy, investors are understandably nervous.  Throw in political gridlock resulting in the absence of a Speaker of the House and a potential government shutdown in less than three weeks and we find ourselves in the most uncertain of times.  Did I mention the UAW strike has yet to be resolved?  While times like these don’t feel good, I can say with certainty that in time, these issues will be resolved one way or another.  Perhaps we won’t like the outcome in every circumstance, but the markets have a way of plodding forward regardless of how we feel about the world or its bouncing from crisis to crisis.  Remaining steadfast in the face of uncertainty often results in better outcomes even if it doesn’t feel great in the moment.

Let’s start with the obvious and perhaps most important issue.  The U.S. economy is gradually slowing despite consumers continuing to spend at record levels.  September retail sales were stronger than expected and credit card delinquencies and charge-offs remained stable.  These are two data points which demonstrate the resilience of the economy.  However, it should be noted that despite weekly unemployment claims falling, the number of continuing claims is rising.  This suggests that while layoffs aren’t happening (yet), people are having a harder time finding jobs.  Leading indicators are also falling which isn’t exactly a great sign, but remember it is the entire goal of the Federal Reserve to slow down the economy to bring inflation back to more normal levels.  A slowing economy is not to be unexpected.  While talk of a soft landing has mostly receded, it has been replaced with an increase in the possibility of a hard landing or maybe even a mild recession in the first half of next year.  Perhaps diversification will come back in favor and returns will broaden across sectors and asset classes as a result.

In company news, we learned of several large companies teaming up to leverage each other’s strengths. For example, Amazon is ready to spend $1 billion with Microsoft for the latter’s 365 Cloud tools.  Google and Qualcomm are teaming up to make a new chip for wearable technology.  And finally, IBM and Amazon are teaming up to build a generative AI platform.  It seems cooperation is the new modus operandi in Silicon Valley.  

In other news, Coca-Cola is looking to expand in the ready-to-drink alcohol market and Starbucks is looking to reduce cup sizes in China.  That last one had me scratching my head.  It is being posed as a net benefit to those in China since they don’t particularly like large drinks (or so we’re told).  I can’t help but see it as a means of increasing profit margins since it’s unlikely the company will reduce prices on these smaller drinks.  Right? Touching on a story I mentioned a few weeks ago, CVS has announced it plans on pulling all cold remedies that contain the decongestant phenylephrine after the FDA announced in September that the drug doesn’t work.  Oddly, the FDA has yet to formally order that therapies containing the drug be removed from shelves.  Some companies that could be affected include Kenvue’s Sudafed, Procter & Gamble’s DayQuil and NyQuil, and Haleaon’s Robitussin and Triaminic.  And just in case you were wondering, yes, the litigation industry has just started its engines.  Two consumers in California filed a lawsuit in the U.S. District Court in Sacramento against both makers and retailers of phenylephrine medications alleging that the companies made millions selling products that they knew didn’t work.  The named defendants include CVS, Walgreens, Amazon, Walmart, Target, and Procter and Gamble.  Call me crazy, but why isn’t the FDA a named defendant?  After all, wasn’t it the FDA that approved this drug in the first place?

In closing, I turn to something we have all taken for granted and I’d venture none have given much thought to.  I read this week that real estate commissions could be the next fee on the chopping block.  In recent years, technology has made a host of consumer transactions cheaper – from booking a vacation to buying stocks – but commission rates for selling a home haven’t budged.  That could soon change.  A pair of class-action lawsuits challenging real-estate industry rules threaten to disrupt a compensation model that hasn’t changed in decades.  The issue is that sellers looking to use alternative means are finding themselves locked out of the market because realtors won’t show their homes.  Buyers have little incentive to negotiate with their agents because they don’t pay them directly, while sellers are loath to experiment with a lower commission rate for fear that agents will steer clients away from their home.  Confirming this is a recent study which found that home listings offering lower buyers’ agent commissions take significantly more time to sell and are much less likely to sell at all.  While it is unlikely you’re looking to buy or sell with mortgage rates at 8%, I thought you should know change may be coming. 

Bruce J. Mason, MBA