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South Korea and the Fountain of Youth

What a great way to end the quarter.  Ferrari hits an all-time high with a market cap greater than General Motors and Ford combined, Apple breaks the $3 trillion valuation mark (the first company to do so), and all three major U.S. indexes close higher for the quarter.  If you haven’t felt euphoria before, this is what the market is feeling now.  We have a reality check coming with earnings announcement set to begin in a couple of weeks, and in late July the Federal Reserve may stand behind its two-rate hike statement, or eat crow and realize the economy is slowing adequately without additional tightening.  For once, the adage “Sell in May and Go Away” didn’t hold true.  Be glad you were invested these last few months.

As I mentioned in our research meeting this week, the economy is headed into no-man’s land this summer.  The economic data is all over the place with some indications that a slowdown is beginning to take hold in the consumer discretionary space, while other indicators suggest the resilience of the economy is stronger than anticipated.  Consumer confidence has really picked up in recent months while unemployment claims once again fell unexpectedly.  Yet, we see capital spending reductions, as well as, inventory reductions occurring which suggest companies are less sanguine about the future.  Meanwhile, home sales are back up again, as are home prices.  Like I said, this is a transitionary period with few catalysts to push the market higher or lower.  We are looking forward to earning announcements in the weeks ahead as they will provide the forward guidance we need to assess the business landscape.

One area that could be impacted later this year is the consumer discretionary industry on the back of today’s Supreme Court ruling on student loan forgiveness.  It is not my habit to make political statements nor cast judgments.  However, from an economic perspective and a stock market perspective, the resumption of student loan payments, after an almost four-year hiatus, could be a headwind in the fourth quarter.  Analysts are already trying to figure out its impact, with some suggesting those companies most at risk are Best Buy, Target, DoorDash, Gap, Nordstrom, Nike, Under Armour, and Victoria’s Secret.  Other analysts put more emphasis on the restaurant industry with McDonald’s, Yum! Brands, Noodles, Wendy’s, Starbucks, and Chipotle are in the hot seat.  The common denominator is that these are all brands that Gen Z and Millennials embrace daily.  While not mentioned, we might include Amazon and streaming services like Netflix among these names, although their appeal goes beyond young adults and in the case of Amazon go beyond just retailing.  As such, they may fare better than those mentioned above. 

In company news, Amazon announced this week it plans on expanding its AWS (cloud services) division in Ohio.  Cloud services are its most profitable unit with sales increasing 16% to $21 billion in its most recent quarter.  The company has already invested $6.3 billion in Ohio since 2015, with an additional $7.8 billion earmarked with this latest announcement.  This expansion marks the second-largest single private-sector investment in Ohio’s history.  In other news, Bank of America is considering its own expansion plans with a move to establish branches in four new states where it hasn’t operated before – Nebraska, Wisconsin, Alabama, and Louisiana.  This push ramps up competition with JPMorgan Chase, the U.S.’s largest bank.  I don’t know about where you live, but I can’t seem to throw a rock without hitting a bank.  They’re everywhere at a time when online banking has never been more ubiquitous.

In closing, I came across an interesting story this week in which more than 51 million people in South Korea awoke on Wednesday to find themselves a year or two younger according to a new law.  Under recent legislation, South Korea will adopt an “international age” which differs from its cultural practice of counting babies as one year old at birth and adding a year for everyone on January 1st.  A baby born on December 31st would be two years old in just a couple days.  As globalization continues its unabated march forward, I am left wondering what other local practices will eventually find their way into the garbage bin of history.  Not that I recommend we adopt this system, but it does make one a bit nostalgic for a time when people and countries had larger cultural differences.  Now you know.  

Bruce J. Mason, MBA