Dear Friends,
Last week, Albemarle County declared a state of emergency and issued evacuation alerts due to brush fires spreading in the Taylors Gap area, exacerbated by low humidity and high winds. Hundreds of households experienced power outages from downed power lines, suspected of igniting the fires, though official causes are pending fire marshal investigation. We wanted to recognize Goochland County Fire-Rescue and Emergency Services volunteer Mike Normansell, who happened to be in Charlottesville when a fire broke out in the Colston area. As the first person to detect the fire, Mike summoned the local Albemarle Fire-Rescue team and jumped into action fighting the fire preventing its spread. You can read more here.
Economy, Geopolitics, and Commodities
1. Fed Officials Still See Three Interest-Rate Cuts This Year
The stock market rose to new highs on March 20th when a narrow majority of Federal Reserve officials reaffirmed projections to cut interest rates three times this year despite firmer-than-anticipated inflation in recent months. While the latest data hadn’t given officials the confidence they would need to begin rate cuts, Chair Jerome Powell said his outlook for inflation to continue declining hadn’t changed substantially in recent weeks. The projections released during the Fed meeting were little changed from December and showed most of his colleagues expect two or three cuts this year.
The central bank held steady its benchmark federal-funds rate in a range between 5.25% and 5.5%, a 23-year high. Some investors had braced for the Fed to dial back expectations of rate cuts and cheered the more optimistic scenario laid out by policymakers. The Fed’s projections had been the subject of endless speculation on Wall Street because brisk inflation readings for January and February interrupted a streak of cooler reports in the second half of last year. That raised questions over whether inflation will return to the Fed’s 2% target as quickly as officials and investors have anticipated. Stubborn inflation would weaken the case for rate cuts. Powell conceded that inflation had been stickier than anticipated over the past two months and cautioned that policymakers shouldn’t be “dismissing data that we don’t like.” But he said the latest data “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward 2%.” The figures also hadn’t given officials the confidence that inflation will settle around their goal, a precondition for cutting rates if the economy is growing steadily, he said. 1
2. Bank of Japan Ends the World’s Only Negative Rates Regime
Japan’s central bank raised interest rates on March 19th for the first time since 2007, ending the world’s only negative rates regime and other unconventional policy easing measures enacted over the course of the last few decades to combat deflation. These changes mark a historic shift and represent the sharpest pullback in one of the most aggressive monetary easing exercises in the world. The Bank of Japan though cautioned it’s not about to embark on aggressive rate hikes, saying that it “anticipates that accommodative financial conditions will be maintained for the time being,” given the fragile growth in the world’s fourth-largest economy.
The BOJ raised its short-term interest rates to around 0% to 0.1% from -0.1% at the end of its two-day March policy meeting. Japan’s negative rates regime had been in place since 2016. It also abolished its radical yield curve control policy for Japanese sovereign bonds, which the central bank has employed to target longer-term interest rates by buying and selling bonds as necessary. The move sparked a sell-off in the yen against major currencies, with bond yields slipping as the Nikkei stock index closed higher after a volatile trading session.4
3. U.S. Home Sales Jumped 9.5% in February
Home sales rose in February from the month prior, marking the first time in more than two years that sales increased for two consecutive months. Sales of existing homes, most purchases, surged 9.5% to a seasonally adjusted annual rate of 4.38 million, from the National Association of Realtors. Economists surveyed by The Wall Street Journal had estimated sales of previously owned homes to fall 1.3% in February. The momentum in sales over the last two months comes just ahead of the spring selling season and follows one of the most sluggish periods for the housing market in recent history.
Home sales in 2023 fell to the lowest levels in nearly 30 years. Since 2022, higher mortgage rates, high home prices and limited inventory have stifled sales, which were still down 3.3% from a year earlier in February. But mortgage rates that have dropped since last fall and a now-rising inventory of homes for sale are giving some buyers more choices. Home buyers in February also benefited from a more than 10% increase in the number of homes available for sale, compared with the same month a year ago, NAR said. Demand, however, appears to be outstripping supply, leading to rising prices that will inevitably push some buyers out of the market. The national median existing-home price rose 5.7% in February from a year earlier to $384,500. That was a record high price for the month of February, NAR said. All four regions of the country analyzed by NAR saw price increases.1
4. Baltimore Bridge Collapse Will Likely Block Coal Exports for Weeks
Vessel traffic at the Port of Baltimore was completely shut down immediately after a containership hit the Francis Scott Key bridge just south of port early Tuesday. Maryland Gov. Wes Moore said there was no estimate of when the fifth-busiest container port on the U.S. East Coast would reopen. Coal exporter Consol Energy said its operations were disrupted and that it was working with the U.S. Coast Guard, which has established a safety zone around the bridge site that has blocked vessel access to the company’s marine terminal. “Our primary concern is for the safety of everyone affected,” the company said.
It is likely to shut down the port’s coal exports for as many as six weeks and block the transport of up to 2.5 million tons of coal, said Ernie Thrasher, chief executive officer of Xcoal Energy & Resources LLC. The US exported about 74 million tons of coal last year, with Baltimore the second-largest terminal for the commodity. Plugging up a major coal hub threatens to disrupt global energy supply chains that have finally begun to work out the kinks left over from pandemic slowdowns. “You’ll see some diversion to other ports but the other ports are pretty busy,” said Thrasher at Xcoal, a Pennsylvania coal trading firm that works with several suppliers. “There’s a limit on how much you can divert.” Baltimore ships less than 2% of global seaborne coal so the bridge collapse will have little effect on global prices, Thrasher said. He added that the coal that moves out of Baltimore includes a lot of India-bound thermal coal, which is used for electricity generation.2
5. What’s Next for Gold? Look to China for Clues
Chinese investors are going all-in on gold. The country’s central bank has pushed its gold reserves to a record level. Consumers in the country are loading up on gold jewelry, in part because they are nervous about the shaky economy. Stock traders are buying the shares of gold miners, and rushing into exchange-traded funds that track the price of the metal. That has primed the pump for the commodity’s recent rally and will offer support as the price of gold heads into uncharted territory. “I don’t think Chinese demand will be enough to propel global gold prices higher. But what it does mean is that any correction should be cushioned by the strong levels of physical demand that we’re seeing there,” said Nikos Kavalis, a managing director of precious-metals consulting firm Metals Focus.
Gold hit an all-time high this week, trading above $2,200 a troy ounce after the Federal Reserve indicated that three interest rate cuts are on the cards for 2024. The price of gold often goes up when interest rates go down, in part because bond returns look less attractive in comparison. But traders have a record of second-guessing the Fed when economic data comes in hotter than expected, and any doubts about the pace of cuts could weigh on the price of gold in the coming months. The Fed is facing a tricky balancing act that means rate expectations are likely to shift constantly: The economy is booming, but consumers and small businesses are feeling squeezed by higher borrowing costs.1
Financial Markets
1. S&P 500 Closes at a Fresh Record
The S&P 500 rose Thursday, registering its best first-quarter performance in five years. The broad market benchmark was up 0.11%. The Dow Jones Industrial Average added 47.29 points, or 0.12%. Both indexes closed at records, and the S&P 500 hit a fresh all-time high during the session. The Nasdaq Composite slipped 0.12%. For the quarter, the S&P 500 added 10.2% for its best first-quarter gain since 2019, when it rallied 13.1%. The 30-stock Dow advanced 5.6% during the period for its strongest first-quarter performance since 2021 when it jumped 7.4%. The Nasdaq ended the quarter with a 9.1% pop. On a monthly basis, the S&P 500 is 3.1% higher. The Nasdaq added 1.8% in March, while the Dow climbed 2.1%. It was the fifth straight winning month for all three major averages. Earnings results rolled in. Shares of furniture retailer RH and pharmacy giant Walgreens rose after their reports. The cryptocurrency traded a bit below $71,000. Global oil benchmark Brent crude rose 1.6% to finish the quarter above $87 a barrel. Treasury yields edged lower. The 10-year yield settled at 4.192%, off five of the past six weeks. It has risen significantly since the start of the year.4
2. Consumer Firms Lead S&P 500 in Fourth-Quarter Share Buybacks
Retailers and restaurants are enjoying a bump up in gross margins as they finally get relief from rising prices for goods, services, and labor. From Dine Brands Global Inc. to Target Corp. to Mattel Inc., Corporate America is benefiting from business costs that are now rising more slowly or retreating, underscoring the progress the Federal Reserve has made fighting inflation since kicking off its rate tightening cycle two years ago. That cost relief isn’t showing up at the cash register for consumers but is instead boosting company profits and helping fuel a boost in share buybacks.
Returning capital to shareholders is an important and legitimate goal of many corporations. Buybacks are often an effective way to distribute capital, but care must be taken to mitigate downfalls. Buybacks have become a global phenomenon over the past 20 years, with many companies viewing them as an attractive alternative to dividends in returning capital to shareholders. They are flexible, recycle excess cash to the economy, and provide tax advantages in certain. Buybacks have several pitfalls if not used carefully and in the right circumstances. These include being used for personal gain and enrichment, poor timing of investment decisions, contributing to excess leverage, leading to lower levels of resilience. Buybacks can add long-term value when the issues above are mitigated, and key criteria are met. These criteria include alignment with a company’s long-term plan, adequate liquidity buffers, and fulfillment of additional investment needs.2
3. iPhone Shipments in China Fell 33% in February
Apple Inc. iPhone shipments in China fell about 33% in February from a year earlier, according to official data, extending a slump in demand for the flagship device in its most important overseas market. The government figures showed foreign brands shipped only about 2.4 million smartphones last month, which was affected by the later timing of the Lunar New Year. Apple accounts for most of those shipments, as the only overseas player with a meaningful market share. The February decline marks a second consecutive month of lower shipments. In January, the company shipped a total of roughly 5.5 million units, or about 39% fewer handsets than in the prior year, according to China Academy of Information and Communications Technology figures. The shares dropped less than 1% in New York on Tuesday morning. They have declined about 12% so far this year, making Apple an outlier among its Big Tech peers.
Cupertino, California-based Apple has seen its best-selling product struggle in the world’s biggest smartphone market since the September debut of its latest generation models. The return of Huawei Technologies Co. as a viable rival in the premium phone segment has stolen share away from Apple and the slowdown in iPhone sales prompted rare discounts from the US company in January. The overall Chinese smartphone market also contracted by almost a third in February, illustrating a wider consumer reluctance to spend on discretionary items. Analysts still predict growth over the course of the year, but they expect iPhone sales to keep deteriorating. Jefferies analysts led by Edison Lee said in a note this week that they see the iPhone leading market declines with more than 20% for the year so far.2
4. Boeing CEO To Step Down in Broad Management Shakeup
Boeing CEO Dave Calhoun will step down at the end of 2024 in part of a broad management shake-up for the embattled aerospace giant. Larry Kellner, chairman of the board, will not stand for reelection at Boeing’s annual meeting in May, Boeing said Monday. He will be succeeded as chair by Steve Mollenkopf, who has been a Boeing director since 2020 and is a former CEO of Qualcomm. Mollenkopf will lead the board in picking a new CEO, Boeing said.
And Stan Deal, president, and chief executive of Boeing’s commercial airplanes unit, is leaving the company effective immediately. Moving into his job is Stephanie Pope, who recently became Boeing’s chief operating officer after previously running Boeing Global Services. The departures come as airlines and regulators have been increasing calls for major changes at the company after a host of quality and manufacturing flaws on Boeing planes. Scrutiny intensified after a Jan. 5 accident, when a door plug blew out of a nearly new Boeing 737 Max 9 minutes into an Alaska Airlines flight. Boeing’s production problems have delayed deliveries of new planes to customers and hampered growth plans. CEOs of some of the company’s largest customers, including United Airlines, Southwest Airlines and American Airlines have publicly complained about the delays. Boeing’s stock added 1.4% on Monday after the announcements. Its shares are down more than 26% so far this year.4
5. FDA Approves Merck’s Drug for Rare, Deadly Lung Condition
The Food and Drug Administration on Tuesday approved a drug from Merck designed to treat a progressive and life-threatening lung condition in a win for both the drugmaker and for patients suffering from the rare disease. The agency greenlighted the therapy, which will be marketed as Winrevair, for adults with pulmonary arterial hypertension. The decision is a big step for the roughly 40,000 people in the U.S. living with that disease because Winrevair is the first drug to target the root cause of the condition. Other available medicines only help manage symptoms. The condition refers to when the small blood vessels in the lungs narrow. That leads to high blood pressure in the arteries that carry blood from the heart to the lungs, which can damage the heart and result in limited physical activity. Starting from diagnosis, the mortality rate of patients is 43% by five years, according to Merck.
Merck estimates that Winrevair will be available in select specialty pharmacies in the U.S. by the end of April, according to a company release. The drug is an injection administered every three weeks and is distributed in single-vial or double-vial kits. It will be priced at $14,000 per vial before insurance, a Merck spokesperson said in a statement. But the company has a program that offers eligible patients help with out-of-pocket costs and copays. Winrevair is meant to be used along with existing therapies for the condition to increase exercise capacity, lessen the severity of PAH and reduce the risk of the disease worsening. The approval is critical for Merck, which is working to diversify its revenue stream as its top-selling cancer immunotherapy Keytruda approaches a loss of market exclusivity in 2028. 4
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.reuters.com
(4) www.cnbc.com
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Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
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