⏸️🏦 Fed Expected to Hit the Pause Button
Happy Sunday all,
I wanted to tell you about a project I’ve been mulling over. On YouTube, we come out with weekly Personal Finance content which has been solid this entire year. Each video takes me and my team collectively between 8-20 hours per video - which is doable, and we’ve really settled into a great system and rhythm.
Lately though, I’ve been feeling the urge to go deeper into topics and spend more time making high-quality, thorough, finance videos about certain topics that deserve longer-length videos. So my team and I are now brainstorming deeper topics we can dive into to create and work on for 2-4 weeks while we still work on the regular weekly content. If you have any topics for consideration, please reply directly to this e-mail! Some ideas so far include: Wealth Inequality in the U.S./World, Modern Banking Explained, Taxes, and National Debt Explained, etc. Big, broad topics that anyone can watch.
Hope you have a great Sunday. Love u.
— Humphrey, Tim & Rickie
Market Report
The Federal Reserve is expected to hit the pause button on interest-rate increases at its June 13-14 meeting, marking the first time in over a year that rates have not been raised. This comes after a series of aggressive tightening measures by the central bank that has seen a cumulative rise of 500 basis points since March 2022.
More than 90% of economists expect the Federal Open Market Committee to hold its federal funds rate steady at 5.00%-5.25% at the end of the upcoming meeting, although a minority predicts at least one more hike this year due to the resilient US economy.
Despite the expected pause in June, markets have priced in a potential rate hike at or before the July 25-26 meeting, fueled by strong economic data and comments from several Fed officials. This marks a shift from earlier predictions of rate cuts later this year, which have gone away quickly. Persistently high inflation remains a significant concern, with April's figures registering at 4.4% based on the Fed's preferred measure, well above its 2% inflation target.
Meanwhile, the U.S. job market has remained robust, with the unemployment rate still well below 4% despite some increases. The housing market, generally sensitive to interest rates, has also proven surprisingly resilient to higher borrowing costs, experiencing only minor price falls from the levels seen during the pandemic-related boom.
However, it's worth noting that about a third of economists expect the Fed to implement at least one more rate hike this year, while over a quarter forecast at least one rate cut by the end of 2023, a decrease from the last poll. The perceived risk of the world's largest economy falling into a recession this year has also decreased compared to a few weeks ago.
Executives at retail companies are increasingly concerned about escalating in-store shoplifting which is causing significant losses. The problem, known as shrinkage in industry terms, primarily includes theft and to a lesser extent, damages or expired stock. Retail giants such as Target and Ulta Beauty have announced significant losses due to shrinkage. According to Target, it anticipates shrink-related losses to detrimentally affect profitability by $500 million this year, while Ulta Beauty, attributing its cut in full-year margin outlook to theft, has not disclosed the expected financial impact.
Aside from the direct cost of lost inventory, there's a potential knock-on effect as increased theft could discourage customers from shopping at physical stores, shifting their preference to online platforms which often yield lower margins for the retailers. A report by the National Retail Federation estimates the cost of lost inventory for retailers was a staggering $94.5 billion in 2021, witnessing an increase from $90.8 billion the previous year. The rise of online marketplaces, which make it easier for thieves to sell stolen goods, is suggested to be a contributing factor to the rise in retail theft.
The escalation in discussions about shrinkage among executives may also be fueled by an increase in media coverage of crime. The number of news articles mentioning theft has seen a consistent rise since the onset of the pandemic, with the highest surge reported in May.
Stock selling by companies and their largest investors is taking place at a scale not seen in years, as stock prices recover. Since April's end, companies and private-equity firms have conducted follow-on sales worth over $24 billion.
Follow-on sales, also known as follow-on offerings or secondary offerings, are sales of stock that occur after a company has already gone public. The initial sale of stock to the public is known as an initial public offering (IPO). After this, any further sales of stock are considered follow-on offerings.
A majority of these transactions happened in May, significantly exceeding the monthly average of $6.9 billion in the previous year. Moreover, these sales were executed with smaller than usual discounts, indicating a strong market.
The S&P 500 entered a new bull market last week, with a 20% surge above its October low, driven by a rally in big technology stocks. This followed a hit on the index last year due to inflation and other concerns. Close to half of the stock sales have been from large shareholders such as private-equity firms, which are exploring innovative ways to sell companies, or parts of them, to return money to their capital providers.
Despite the usual private-equity strategy of buying, optimizing, and then reselling companies or taking them public, the recent sluggish IPO market and subdued M&A activity have made these traditional exits challenging. Thus, these entities are seizing the current opportunity in the markets to return capital to their limited partners.
Interestingly, sellers usually offer a discount on follow-on offerings to attract buyers. While these discounts fell to an average of 8.4% during the high-demand period of 2020 and 2021, they rose to around 12% at the start of 2022. However, this discount began to decrease in May to 8.3% and continues to tighten in June. Definitely a lot of buyers in the market.
Forecast Ahead
Big Number: 286 Corporate Bankruptcies
According to data by S&P Global Market Intelligence, 286 companies in the U.S. filed for bankruptcy during the first five months of 2023. This represents the highest number recorded for this period since 2010.
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