Stocks finished mixed yesterday clawing their way back from a weak open as interest rates fell in front of today’s CPI report. That report is likely to be market moving. If March inflation cooled, stocks and bonds will both rally. If March inflation continued to run a bit hot as it did in January and February, markets likely will react negatively. No sense in my guessing. We’ll digest the numbers after they are reported later this morning.
For some time, I have been looking at the market in these daily missives on a macro basis. Over the past three months, what we have seen is an economy doing better than expected with inflation running a bit higher than previously forecasted. While prognosticators continue to reduce the number of Federal Funds rate cuts expected this year as a result, the stock market doesn’t seem to care. The leading averages have increased by 8-9%, a number that historically would qualify as a good year.
But the overall numbers mask a wide dispersion in individual company performance. Just take a look at the Magnificent 7, the huge market cap names that all performed sensationally last year and accounted for the wide gap between tech growth stocks and the rest of the market. This year, however, has been different. While Nvidia# and Meta Platforms# continued to soar, Apple# has faced much stiffer competition in China while Tesla is delivering fewer cars than it did a year ago, a function of consumer disenchantment with EVs, Chinese competition, and a stale lineup of cars offered for sale. Note that the positives and negatives in these four instances are largely unrelated to U.S. GDP growth, interest rates, or the pace of inflation.
Let me switch to retail. There is clear pressure on companies serving the lower income consumers. Look at the weak performance of the dollar stores, for instance. But for many others, performance this year is either determined by specific company factors or changes in the competitive environment for specific retail segments. For example, Nike and Lululemon have not met expectations even as both continue to grow. Why? Competition. Activewear is highly competitive. Decker Outdoors, which sells Uggs and Hoka sneakers is have a spectacular year, probably at Nike’s expense. Names like Vuori are increasing competition for Lululemon. Again, it isn’t the overall economy that’s creating the shifts in demand.
Post-Covid changes in behavior are impacting specific stocks and sectors. Businesses allowed to stay open during the early stages of the pandemic saw a surge in sales in 2020 and 2021 only to suffer relapses in 2023 as buyers went elsewhere. Changes in habit or lifestyle caused by the pandemic including for instance, working from home, led to surges in purchases of home PCs followed by an absence of demand. Now, some of those 2020 purchases are ready to be updated in 2024 and 2025 if only to meet the additional requirements of Generative AI.
Then there are the fads. Peloton bikes are now coat hangers. Who’s buying fake hamburgers made of processed peas? Some of that spills over into very big names. Part of Tesla’s problem today is that the cache of owing one isn’t what it was two years ago.
Then there are macro factors that, economically, only affect a relatively small number of companies. Reshoring and infrastructure spending have led to a surge in non-residential construction. But even there, the boom is uneven. Oil prices are rising as the economy stays strong. Yet natural gas prices at the well head in some key areas are below zero. Producers literally have to pay to have the gas taken away. Yet our government wants to limit the export of liquified natural gas to keep prices low. Zero isn’t low enough?
I don’t need to go further. I think everyone can get the point. For most companies, the macro winds aren’t the dominating force today. Company and industry specific factors are more important. The conclusion is simple. Most of the time, while macro factors like GDP growth and changes in interest rates can’t be ignored, companies are in control of their own destiny. You also might remember that one of my favorite words is pivot. Good companies constantly pivot. If diet pills are going to change how we eat, food producers are going to change what they produce. As lifestyles become more casual, makers of everything from shoes to shirts will adjust. Those that don’t will die.
But that doesn’t mean that macro winds can be ignored. In particular, we are living with an administration in Washington that imposes more regulations than most previous ones. An essential difference between Republican and Democratic philosophy, at least historically, is that Republicans believe free enterprise and capitalism is the most efficient way to get things done while Democrats believe that while capitalism can be efficient it also must be regulated. One can’t let the fox roam the chicken coop freely.
The current administration has several broad themes that it wants to accentuate through more regulation. It wants to exert more control over the behavior of large tech companies. It wants to impose price controls on drugs and health services. It wants to see more products made in the U.S. with a higher component of union labor. It wants to accelerate the path toward the elimination of fossil fuels. It’s not for me to comment on these goals. But what I can say, is that companies are forced to pivot to play by the new set of rules. In some cases, that pivot will be accompanied by higher costs, at least in the short run. When Washington chooses to allocate capital, it often stumbles. We will see, for instance, as it hands out billions to build high performance semiconductors whether that largesse leads to changes in leadership or wasted investment. Will Intel climb back to be king of the hill? We won’t know for years. But what we do know is that the companies that make the equipment that produce all those chips will benefit no matter which producer comes out on top.
In general, Wall Street hates government interference. Businesses that make gobs of money are the good guys. The cops that police their behavior are the bad guys. But history shows that such conclusions aren’t that simple. The break ups of AT&T and big oil, more than a century ago, created winners and losers. In some cases, the winners were companies that didn’t even exist at the time of breakup. Look at T-Mobile, a nimble upstart competing against bureaucratic giants. Again, the key word is pivot. If there is a void, some enterprise will fill it. If too many try to fill the void, there will be a battle for survival. Good companies constantly pivot. A great example is Microsoft. It started as a producer of PC operating systems when every computer sat alone, it evolved into PC applications, then enterprise solutions, then moved to the Internet (Windows versus DOS), then to the cloud and now to AI. Pivot, pivot, pivot. And it isn’t done.
Pivot is also why the leadership team for any company is important. It can’t look backwards. Doing things the old way never works. Complacency is a cancer. When Microsoft issues a new product, competitors will try and do it one better. But so will Microsoft. Today’s new product is merely a steppingstone to future greatness. On Wall Street, you hear the acronym TAM all the time. TAM stands for total addressable market. If you sell women’s apparel and start making menswear, you increase the TAM. But TAM also changes by creating new markets. That’s where technology comes in. The Cloud wasn’t always there. Tech companies created it. Generative AI is a new creation. As the rule-based structure of AI is more fully developed, needs will change. Users will want to then apply those rules to more efficiently solve problems, a process techies call inference. That opportunity will be humongous. Who will lead? Aah, that’s an untold tale we will learn the answer to over the next several years. Washington and the regulators will be watching as well.
Today, actor Steven Seagal is 72.
James M. Meyer, CFA 610-260-2220