With news about the banking issues subsiding, the markets had an opportunity to gain some traction this week. All three major indices finished the week higher with the S&P 500 eking out the others by just a small margin. Investors are overdue for a respite from bad news and fortunately, this week we got just that. While I can’t say with certainty that there won’t be further bank issues, and we will almost certainly hear about expanding bank regulation, I am hopeful that the potential crisis has been averted.
Attesting to the decline in fear, banks’ borrowing from the Fed declined this week. Banks’ borrowing from the Federal Reserve fell by $11.3B as of March 29, as the amount of borrowing from the Fed’s discount window dropped more than the use of the new lending facility increased. This suggests that the extent of acute problems in the banking sector is moderating, even if a small subset of banks remain stressed and the impact of recent shocks remain unclear. Additionally, $66B flowed into money market funds during the week which was slower than the $132B increase the previous week. While I wouldn’t yet say “Mission Accomplished,” I would say the current policy is working to abate immediate fear of further fallout.
Having said that, the second derivative of the recent stresses in the banking system is working in tandem with monetary policy to slow the economy further. Namely, it remains unclear how much these issues are leading to slower bank lending, which could lead to a credit crunch. On the bright side, those same strains could help hasten a further decline in inflation, bringing the economy back into balance faster. There are still too many variables to fully know how this is going to play out, but it appears some of the heavy lifting will now occur outside of the Fed’s policies.
In company news, McCormick, the spice company, reported earnings that came in ahead of expectations and saw the stock rise 10% on the day. Apparently, not everyone is eating out. Novartis jumped 8% on Monday when it announced positive results from its highly awaited breast cancer trial. The trial found that their latest drug candidate significantly reduced the risk of disease recurrence when used with standard therapy. And lastly, there are a couple persistent rumors that keep making the rounds. The first is that Amazon could be in the market to acquire AMC Entertainment. I must admit this one seems a bit of a stretch given Regal Theaters appears to be a better fit. However, having announced it plans on spending $1B this year on movies to be aired in movie theaters, it seems like an interesting strategic move to own said theaters. The second rumor is that Apple is looking to acquire Disney for much the same reason as Amazon in the aforementioned rumor. Apple wants to gain a further toehold in entertainment, and who better than Disney to make that happen. While these rumors may not pan out, it is nonetheless worth remembering that the best companies rarely rest upon their laurels. Even in difficult times, they make strategic moves.
In closing, I turn to the recurring theme of electric vehicles (EVs). In recent years, EVs have made great strides in terms of both technology and sales. Electric charging stations are being built around the country, once believed a challenging hurdle to overcome. The number of EV models has grown substantially over the years with increased range now regularly pushing 300 miles, which was also believed to be a hurdle. The one thing people aren’t talking about is the cost of these vehicles. While environmentalists espouse the benefits of EVs and Democrats legislate EVs into law (I’m looking at you California), no one seems to be talking about the cost. This week Ford announced it is again hiking the price of its Ford F-150 Lightning. When first introduced less than two years ago, it was slated to have a base price of $40K. In less than two years, that has risen by 50% to a whopping $60K. As of the end of 2022, the average price of an EV is $61,500 according to Kelley Blue Book. With a median household income of $66K (as of 2020) and the middle class defined by Pew Research as being $47K-$141K, it leaves me wondering just how realistic an all EV future is for the average household. Let me know what you think. While I love the idea of EVs, I’m baffled by the economics and where this is headed.Bruce J. Mason, MBA