Since the beginning of August, there has been a reversion in the markets. The Nasdaq, up 37% at its peak, has now given back some of those unfounded gains. Meanwhile, the Dow Jones Industrial Average, which had lagged both the Nasdaq and S&P 500 significantly all year, now appears to be gaining ground. Perhaps we’re not the only investors paring back gains in the technology sector and finding more reasonable valuations elsewhere. We expect this reversion to continue as the markets digest further trends in inflation, unemployment, and future Federal Reserve interest rate policy. For now, caution seems to be the better strategy.
What moved markets this week were two pieces of data that were somewhat contradictory. On Thursday, we learned that inflation rose slightly less than expected in July, which caused markets to rocket higher before finishing the day almost flat. While the news was good, economists focused on inflation from a shelter, which accounts for 90% of the inflation and is the bane of the Federal Reserve. Furthermore, energy prices which had declined significantly this year and are a big part in the decline in inflation, are now starting to move higher once again. And finally, unemployment claims came in a bit higher than expected, bucking the trend lower in recent weeks. All told, the economic data is a mixed bag for now, with any piece of headline news having the potential to move markets.
The silver lining is that consumers are continuing to spend money. Perhaps not as often on luxury items, but on increasingly expensive necessities. It was reported this week that consumer borrowing expanded by almost $18B in June versus $13B expected and $9.5B in May. Total outstanding consumer credit rose above $5.0T, while revolving credit, which includes credit card debt, broke $1T for the first time. Credit card debt is rising at an annual rate of 7.1%, far outpacing inflation (and I might add wage growth). I know this sounds ominous, but remember more than two-thirds of GDP growth is attributed to consumer spending. While I don’t want anyone to go into debt beyond their means, the very foundation of our economy is built upon the premise that people spend more each year. Inflation is not an unintended consequence, but instead an important part of what makes our economy work.
In company news, Nvidia introduced a new next-generation superchip which is built exclusively for accelerated computing and generative AI. This did little to stem the tide as the stock continued to see weakness in the face of substantial profit-taking. Perhaps the most intriguing news this week was from Zoom, the software company that makes remote meetings possible. Despite being one of the biggest companies behind the remote work revolution, it is having its employees return to the office a minimum of two days a week. While not a full-time return to the office, it is perhaps the last vestige of a stalwart in this space. And finally, WeWork Inc., a provider of “coworking” spaces, has announced it may no longer be a going concern. After a tumultuous start and a failed IPO in 2019, the company rose from the ashes to gain prominence. At its peak, it had almost 44 million square feet of office space and the financial backing of SoftBank. Unfortunately, between those working remotely, and at the other end of the spectrum, companies requiring employees to return to the office, it seems there was just no market for WeWork after all.
Speaking of closing, I discovered something this week that may have you looking at your UPS driver with a bit of envy. I mentioned a few weeks ago that the Teamsters Union was threatening a strike if a new contract wasn’t reached with United Parcel Service (UPS). We were pleased that the negotiations were successful and a deal was reached. What I didn’t know was some of the details of the new contract. It turns out that, according to UPS CEO Carol Tome, by the end of its five-year contract with the Teamsters Union, the average full-time UPS driver will make about $170,000 in annual pay and benefits, such as healthcare and pension benefits. In a surprise twist, tech workers now say they feel underpaid in comparison and Indeed reports searches for “UPS” or “United Parcel Service” in the title spiked more than 50%. While I wish you luck submitting your resume, I imagine it might be easier to get a job in Silicon Valley than at UPS. Now you know.Bruce J. Mason, MBA