Stocks shot to record highs on Friday as consumer confidence shot up and early earnings season reports reinforced the notion that the U.S. economy is on solid footing.
Over the past week, two other important headline news items emerged. First, Ron DeSantis dropped out of the Republican Presidential race leaving only Nikki Haley as a viable opponent to Donald Trump for the party’s nomination. For her bid to stay alive, she probably has to win or come very close in tomorrow’s New Hampshire primary. New Hampshire allows independents to vote, a factor that will aid Haley. Without a great showing tomorrow by her, the race for the nomination will be all but over. On the Democratic side, there still is no race; President Biden is the presumptive nominee. But his popularity continues to slide, it is now less than 40%. It will be awful hard to win reelection with a popular/unpopular spread of over 15 points.
Part of investor enthusiasm may relate to the above trends. While both candidates are flawed and close to 70% of Americans don’t want a 2020 rematch, Wall Street views the race differently than the average American. Issues like personality, abortion rights, etc. aren’t primary. Earnings and interest rates are. A Trump win, more likely today than a month ago, would mean far less regulation, less effort to break up members of the Magnificent 7, fewer challenges of large mergers, a slower move away from fossil fuels, and a smaller threat of higher taxes. All isn’t a bed of roses. European regulators remain active and without 60 votes in the Senate, it will be hard for Republicans to advance legislation. While Trump won’t likely raise taxes, he talks of massive increases in tariffs. In addition, his actions don’t always mirror his words. He and the Republicans spent like drunken sailors during his previous administration and he says entitlement reform is off the table, ensuring that soaring deficits will continue. Nonetheless, equity investors almost certainly prefer Trump’s economic agenda to Biden’s. Given that stocks look 6-9 months ahead, when polls move in Trump’s direction, stock prices are likely to feel a tailwind.
The other headline news item of note is the cold winter weather. It can snow in New York and Philadelphia after all! It also can be very cold. Note that climate change and global warming are not synonyms. 2023 was the warmest year on the planet. A few cold weeks won’t necessarily change that trend. But climate change arguments aside, what we did learn over the last two weeks is that electric car batteries don’t work really well once the thermometer goes below 20 degrees. And they don’t work at all when temperatures dip to zero. Ford is drastically cutting production of its F-150 Lightning, the much-ballyhooed pickup truck. Hertz is selling 50,000 Teslas from its fleet. Order backlogs are disappearing, replaced by swollen inventories. Close to 40% of the non-Tesla charging stations simply don’t work. And the cost to make an electric vehicle is still far higher than the cost to make an equivalent car that runs on gasoline.
Put climate change arguments aside. While there are some who buy an EV to help save the planet, most buy a car based on other factors including economics and reliability. On those fronts, electric vehicles still lag. Some day they will close the gap just as digital cameras wiped out the market for film-based cameras. But that someday isn’t now. Governments can offer incentives (a mangled effort so far), and can force companies to make electric vehicles in larger numbers. But government can’t force you and me to buy one.
It’s bad business to advertise what you can’t deliver. Wind turbines aren’t replacing fossil fuels to generate electricity except in parts of the country where high winds are persistent and prevalent. The same will prove true for electric cars. The reality is that their performance, at least with current technology, stinks in bitter cold weather. They may still be an attractive purchase in Southern California but not in Chicago. Once winter turns to spring, don’t think new car buyers are going to forget the images of long lines waiting to charge batteries. Range has always been a big issue. Now it will be a bigger one. Someday that barrier will be overcome. As for government regulators, instead of mandates about what parts are made where, they should concentrate on helping to get the experience right.
Moving from the headlines to the arcane, there is something with the acronym SOFR that is replacing LIBOR. SOFR stands for secured overnight financing rate. It measures the cost of borrowing overnight from the Fed using collateralized Treasuries. Lately it has been spiking more often than in the past, a sign that there are at least temporary cash squeezes going on. To alleviate these spikes, Treasury has to pump in more cash. Note that since March 2022, as part of its monetary tightening policy, the Fed has reduced its balance sheet at a pace close to $1 trillion per year. Some of that has been a reduction in mortgages held, but most has been a reduction in Treasuries. Fewer Treasuries available to be used as collateral creates these spikes. The cure is likely to be slowing the pace of balance sheet reduction or stopping it altogether in the months ahead. Some Fed members don’t want to do this until inflation is lower. But liquidity needs can trump monetary policy objectives. No one wants a repeat of the banking mess of last spring nor a spike in overnight repo rates. Therefore, look for the Fed to begin winding down the pace of balance sheet reduction sooner rather than later. This is likely to be an important topic at next week’s FOMC meeting. Needless to say, Wall Street would celebrate any reduction in tightening.
With all the above said, earnings season marches on with most of the important reports happening this week and next. The focus will be on the Magnificent 7 where expectations are high. How investors react to their results should set the tone for the weeks and months ahead.
Today, Linda Blair of “Exorcist” fame turns 65. Former lead singer for Journey, Steve Perry is 75.
James M. Meyer, CFA 610-260-2220