The sideways movement over the last few weeks continued as mutual funds, pension funds, and other large institutions are making their final adjustments for the quarter. With only a few trading days left, the market looks like it is going to finish slightly higher despite the rollercoaster ride it has been. For the first time in a very long time, it will be the Dow Jones Industrial average which takes the lead, suggesting that a cooling off period, particularly among the technology sector, is in order allowing for earnings to catch up to valuations. With stimulus checks hitting bank accounts, it will be interesting to see how the second quarter shapes up. By all accounts, we should expect consumer spending to accelerate, and perhaps see the beginning of inflationary pressures. That’s something else we can say we haven’t seen in a very long time.
Among the many stories that broke so far this year, perhaps the one that has flown under the radar has been the global chip shortage. While it may not seem like that big a deal, it is hard to find any part of the economy that doesn’t use chips in one way or another. The obvious example is computers, but think outside the box. Many automakers have had to shut down production due to a shortage of chips putting earnings at risk and hitting automakers at just the moment they want to ramp up production. The largest foundries, Taiwan Semiconductors (TSM), Samsung, and Micron all have plans to increase production but building new facilities takes time and lots of money. TSM plans to raise $4.5B with the goal of accelerating the build out of its planned U.S. chip facility in Arizona. While the giant foundries race to expand capacity, this could continue to play out over the next few quarters.
There is another story that broke this week which is having ramifications around the globe. One of the world’s largest freight ships has gotten stuck in the Suez Canal blocking all traffic both north and south bound. The ship lost the ability to steer amid high winds and a dust storm. The Suez Canal is used by tankers transporting crude oil from top exporters in the Middle East to customers across Europe and the United States, as well as, cargo ships from the North Sea to Asia. Apparently 10% of total oil transported by tanker goes through the Suez Canal which might explain why both crude oil and gasoline prices were up sharply this week. If all goes as planned, the cargo ship will be freed this weekend.
In company news, we learned that Microsoft is in talks to acquire Discord for approximately $10B. Discord is a text and video chat platform that is used to facilitate public and private communities. While used primarily for gaming, it is a foundation Microsoft desperately needs. Salesforce announced at the end of last year that it had acquired Slack for almost $28B pending regulatory approval. The pandemic jumpstarted this industry last year with employees working from home. While it may have started with Zoom, it now appears the largest tech companies want to integrate similar technology into their own platforms.
And lastly, the Federal Reserve appears on the precipice of ending restrictions on banks paying dividends and buying back shares. These temporary measures were instituted at the start of the pandemic to conserve capital and ensure the financial stability of the largest banks. During this time these banks have not been able to repurchase shares, and in some cases, pay or increase dividends. With these restrictions being lifted, beginning June 30 following the next round of stress tests, we anticipate share buybacks and dividend hikes will commence helping to lift stocks further in the financial sector.
In closing, we learned today that hand sanitizer, face masks, and disinfectant wipes qualify as medical expenses for tax deductions or can be paid for with money from tax-advantages health savings accounts according to an announcement by the Internal Revenue Service (IRS). Taxpayers can qualify for the deduction if they have medical expenses that exceed 7.5% of their adjusted gross income and they itemize their returns. While this only applies to a small percentage of taxpayers, I thought I’d pass along the information in case you qualify. Now you know.
Bruce J. Mason, MBA