Last week’s big economic event, the FOMC meeting, turned out to be fairly a non-event. The Fed kept interest rates steady as expected while raising its inflation forecast and lowering its outlook for economic growth. There was only a slight downward movement in the 10-year Treasury yield while stocks nudged up slightly.
To me, however, the big news of the week was a set of earnings reports from four companies, all leaders in their segments, FedEx#, Lennar#, Micron, and Nike. All four saw their stock prices take a 5-10% plunge after earnings were announced. The declines all related to a gloomy forward-looking outlook for the months ahead. The causes varied. In some cases, it was margin pressure from slackening demand. Some were affected by tariffs increasing input costs. While all the news required a downward adjustment to future expectations, none forecasted an outright earnings or revenue decline in the months ahead.
The question remains; are we in for a soft patch with earnings growing modestly and inflation staying stubbornly above the Fed’s 2% target, or are we on a slide into recession? Read a thousand opinions and you are likely to get a thousand different opinions. This week’s key data will be consumer confidence readings from the Conference Board and the University of Michigan. They both have been declining at a disturbing pace since Inauguration for obvious reasons. There hasn’t been any slowdown in orders from Washington pushing for rapid change. Change brings indecision, at least until one understands the rules of engagement.
It certainly hasn’t helped that initial pronouncements frequently get rolled back either because they were poorly constructed or because they run into legal barriers. The number of Federal workers who have actually been let go and are now off Federal payrolls completely is still barely over 1% of the Federal payroll. That is certain to grow over the coming months. But just as Covid supply chain disruptions plagued the economy and ignited inflation, the psychological impact of all the pronouncements coming from the White House have not only created consternation among consumers, and a slowdown in capital spending commitments from corporations waiting for the dust to settle, it is beginning to create bottlenecks and uncertainty within the Federal bureaucracy.
As we have noted in recent weeks, fixing something broken takes time. While the DOGE team wants to move quickly, cutting muscle with the fat isn’t the best solution. Elon Musk admits that he oversteps at times but promises to fix the mistakes quickly. Time will judge that. But in the meantime, we all wait for the flurry to slow down.
Fortunately or not, the deluge of Executive Orders shows no sign of abating. Over the weekend top executives at Fannie Mae and Freddie Mac were fired. This is one marketplace where mistakes will be treated harshly. Bonds of the Federal Home Loan Bank, Fannie Mae and Freddie Mac are AA+ or AAA, in line with ratings on U.S. government bonds. Any actions that cause even the slightest twinge of risk that Trump might do something to raise the specter that the government might back away from its implied guarantees will roil mortgage markets. So far, that’s a risk. Layoffs at the Social Security Administration and at the IRS threaten to slow payments to seniors and delay tax refunds. Again, so far this is a risk, not a reality but it bears watching.
Over the next two weeks the focus will be on tariffs. The reprieves granted to Mexico and Canada run out this week. Hints they may be extended or modified have futures rising in the pre-dawn hours. The Commerce Department is supposed to roll out a roadmap for reciprocal tariffs on or about April 2nd. Hopefully, as all this gets sorted out in the weeks ahead, the disruptive phase of Washington’s plan will start to give way to greater stability as regulations are stripped away, government downsizes, and deficits start to stabilize. But with that said, through February, the nation’s deficit is running $300+ billion higher than a year ago courtesy of higher interest expense plus increased Social Security and Medicare costs, all deemed untouchable by Trump, at least for now. The benefits from government downsizing will take some time to evolve.
Shortly after the tariff announcements take effect, first quarter earnings season will begin. Judging from the four aforementioned companies that reported last week, one should be apprehensive even accounting for the 5-10% correction in stock prices over the last 8 weeks. FedEx is the nation’s largest trucker. Lennar is the second largest homebuilder. Nike is the leader in footwear. Micron is the largest producer of memory chips in the U.S.
While there are still no overt signs of recession, investors remain apprehensive. Some have moved money to other markets like Europe on the cusp of spending big to become less dependent on the United States. Money is fungible and will go where opportunities are best.
Without trying to make a silk purse out of a sow’s ear, Trump watches markets daily (even if he professes he doesn’t!). While 5-10% corrections are reasonably normal, he doesn’t want the decline to get out of hand. In the past, if he thought the tariff impact was too overbearing, he would back away or make multiple exceptions. This morning’s headlines suggesting some tariff moderation may be forthcoming, reinforces that conclusion. At any rate, markets hate uncertainty and they certainly hate uncertainty with a negative bias. The next few weeks could be disruptive and telling. But if the growth slowdown eases as we move toward summer, there is some hope on the horizon. In the meantime, keeping extra cash reserves seems prudent.
Today, Jessica Chastain is 48. Peyton Manning turns 49 while Jim Parsons reaches 52. Most of us have never heard of Carol Kaye but she was one of the most prolific studio musicians ever heard on literally thousands of different recordings. She was a bass guitarist. Close your eyes and “listen” to Sonny and Cher’s “The Beat Goes On” or Nancy Sinatra’s “These Boots are Made for Walking”. That’s her you hear in your head. Carol Kaye celebrates her 90th birthday today.
James M. Meyer, CFA 610-260-2220