There are times when the economy is growing and investors look at each company individually to determine whether that company is a good investment. However, there are other times when the economy is at a crossroads and investors focus more on the bigger picture, i.e. fiscal or monetary policy than they do on individual company prospects. We’re experiencing the latter rather than the former right now. What this means is that companies, and for that matter asset classes, tend to move together. It also means that otherwise healthy companies are being beaten down along with the rest of the market. To use a colloquial term, investors are throwing the baby out with the bath water.
Having said that, you may not know that all three major indices are on track to finish the week higher despite the volatility and selloff we experienced at the end of the week. This is due to two very good days to start the quarter. Monday and Tuesday saw the Dow Jones Industrial Average up 765 points and 826 points respectively. Unfortunately, heightened volatility is probably going to be with us in the weeks ahead. Earnings announcements will begin next week with some big companies reporting, including PepsiCo, Delta Airlines, Taiwan Semiconductor, JP Morgan, Citigroup, and UnitedHealth Group.
So why did the market sell off today? One word… the jobs report. Okay, maybe two words. As I have mentioned in the past, good news can be viewed as bad news and this week was the perfect example of this phenomenon. The jobs report, released today, stated that 263,000 jobs were created in September. In any ordinary time, this would be considered solid growth. The problem is that solid growth is the last thing the Federal Reserve wants to see. Putting further pressure on the market was that the unemployment rate fell from 3.7% to 3.5% and wages grew by 5%. Put succinctly, more people are working and earning more money. Both have the potential to create more inflation rather than allow inflation to fall. And that is why the Federal Reserve will reluctantly, in all likelihood, raise interest rates another 75bp in November. We hope that if they raise rates again, it might be a smaller increase, but all indications point to another big rate hike coming.
On the global stage, there were a few big developments this week. The most impactful was the announcement by OPEC+ that it intends on cutting oil production by 2M barrels per day. The price of oil jumped higher on the news with the price of gas approaching $4 per gallon at the pump. It turns out Saudi Arabia isn’t happy that the United States has been artificially keeping the price of oil down by unleashing a record number of barrels from the Strategic Petroleum Reserves. Additionally, the UK did an about face on its plan to cut taxes. The unpopular plan, put forward by new Prime Minister Liz Truss, would have worked against efforts by its central bank to curb inflation and stabilize its currency. Lastly, Credit Suisse has come under considerable pressure of late due to some questionable investments over the past year, the biggest being its $5.5B loss when Archegos Capital Management went under. It is never a good look when the CEO puts out a press release assuring everyone that the bank has adequate capital resources and isn’t on the verge of default.
In company news, it seems Apple is eager to move production out of China. While this transition has been slowly going on since 2017, the speed of transition to India and Vietnam is picking up pace. A recent report shows that iPhone exports from India have doubled since April and surpassed $1B. iPhones made in India are reportedly going to Europe and the Middle East. At the current rate, iPhone exports will surpass $2.5B through March 2023 and JP Morgan believes it could shift as much as 25% of its iPhone production to India by 2025. In other company news, Ford announced it plans on hiking the price of its new F-150 Lightning Pro amid supply chain and inflation impacts. The price is set to increase 11% from $46,974 to $51,974 which marks the second price hike since August. If you’re in the market you might want to lock in your order now.
In closing, a coworker shared a news story with me that I want to relay. According to CNBC, the average amount borrowed on a new car is $41,437 with an interest rate of 5.7% and a monthly car payment of $703. This may sound like a lot, and it is, but apparently, a growing number of buyers have payments north of $1,000 per month. As of March 2021, 6% of borrowers had payments exceeding $1,000. Today that number is 14% of borrowers and it is growing quickly. According to at least one dealer, in the last 45 days, approximately 50% of his customers have monthly payments exceeding $1,000. I’m not going to make a blanket statement that no one should be paying $1,000 for a car payment. However, one should spend some time figuring out how such a payment fits into one’s budget and if that big of an expense is worth it. With the supply of cars limited, interest rates rising, and car prices increasing, it is inevitable that a new car payment is going to be high even if spread out over 5, 6, or 7 years. However, it doesn’t need to be painful. If you need help with financial planning to determine how such a purchase might impact your goals, we can help. Now you know.Bruce J. Mason, MBA