Monthly Market Debrief

This is first election where I’ve received multiple texts each day telling me how bad Trump/Harris is/was/will be for the economy/immigration/foreign policy. I need help. How do I stop them??

Market Snapshot

The stock market started the month off in a steep sell off. Investors were convinced the Federal Reserve waited too long to cut interest rates and triggered a recession, but they were quickly calmed when Jerome Powell sang them a sweet lullaby from Jackson Hole, Wyoming. More on that later…

August was also “opposite month” when the Dow Jones and S&P 500 outperformed the darling stocks of the NASDAQ. NVIDIA simultaneously beat earnings expectations but also fell short of expectations? They reported 122% annual growth with $30 billion in revenue, insane numbers. They also announced a $50 billion stock buyback program. So why did stock go DOWN 7% in after market hours? NVIDIA put expectations for revenue growth this quarter at a measly 80%, and investors did not like that. For NVIDIA, it is not enough to keep growing; they have to keep growing at record paces for investors to be happy. NVIDIA is a victim of its own success.

Company Highlight - Starbucks

On August 13th, Starbucks announced a CEO change: Brian Niccol will take over from Laxman Narasimhan. The news shot the stock up from $76.53 on August 12th to $91.02 on August 13th, a neary 19% ($14.49) one day jump. At its peak on the 13th, Starbucks was up 24.5%, a $21.4 BILLION dollar increase in value. That is one hell of a resume bullet. So who is Brian Niccol and how did his name alone cause a $20 billion increase in value? 

Brian is the current CEO of Chipotle (until September 9th) and initiated a crazy turn around. From 2018 to 2023, Chipotle doubled revenue from $4.8 billion to $9.9 billion. Brian led Chipotle through the COVID times that drastically changed how fast casual restaurants operate. They introduced an app with a loyalty program and drive through options. When people didn’t sign up for the app, they added a fan favorite item, the quesadilla, only available on the app and drove a 37% increase in sign ups in one week. Chipotle upgraded the menu with different meat options, Whole30 items, and more queso (duh). Brian clearly believes that you grow a food chain through innovation and new options for tired customers. 

However, to predict what Brian will do at Starbucks, we need to look a little further back. From 2015 to 2018, Brian was the CEO of Taco Bell. He held the reins during the introduction of the Cap’n Crunch Delights and the Doritos Locos Tacos. The former a flop and the later a grand slam to win the Masters (I have to combine sports metaphors like this legend combined foods). This hero goes places others dare not dream. What is he going to combine at Starbucks?? Could he finally crack the code to get customers into Starbucks after 4PM with a StarLoko? Four espresso shots poured over two shots of vodka and two shots of tequila. The perfect way to start a night of clubbing. Or, is he going to focus on opening locations inside gyms instead of grocery stores? He might introduce the WheyBrew. A cold brew, whey protein shake. 30g protein, 300mg caffeine, and the taste of gains.

Brian does come with some baggage though… Thankfully Starbucks has a corporate jet to carry it all. Starbucks has a hybrid remote policy that requires three days per week in the office. Brian is not above the rules, but he will be above the traffic as he commutes three times per week from Newport Beach, CA to Seattle, WA in Starbucks’ jet. Climate activists quickly called out the pollution from private jets, but Taylor Swift fans were happily quiet as jet travel anger finally shifted to a new person. As someone who was lucky enough to grow up in Newport Beach, I get it. I wouldn’t want to move either.

All that to say, it will be an exciting couple years at Starbucks! If you see a job listing for a “drink inventor,” let me know. I have more ideas ready to go. 

Current Event - Potential Rate Cuts

In August, the Bureau of Labor Statistics reported July job numbers which showed rising unemployment. Additionally, they revised the previous 12 months (April 23 - March 24) down by 818,000 jobs. Oddly enough, the correction wasn’t as drastic as analysts expected so the market didn’t react. It was a weird bit of bad news because “the job market is worse than expected” was quickly followed with a “therefore, the Fed will cut rates!” Jerome Powell confirmed as much when he spoke at Jackson Hole and said “the time has come for policy to adjust.”

Here is my stance:

I am strongly against these potential rate cuts. As someone who casually reads/listens to news for about an hour a day, I clearly know more than the professionals who spend 40+ hours a week studying this problem. 

As outlined in a previous letter, the Fed has two mandates: stable prices and maximum employment. Stable prices are defined as 2% annual inflation and maximum employment is defined the same way the Supreme Court defines pornography, you will know it when you see it.

Inflation is trending downward (kind of) but is still above 2% at 2.9%. When compared to the June 2022 high of 9.1%, yes 2.9% is much, much better. However, the June 2023 inflation number was 3%. So, over the past 13 months, inflation only decreased by 0.1%. The Fed’s mandate is 2% inflation, not less inflation than two years ago. If we look at how inflation is trending right now, it seems to be sitting at the 3% mark. 

0 for 1 so far on the Fed mandates.

Unemployment is at 4.3%. The average between 1948 and 2023 is 5.69%. So 4.3% is still below average. Yes, unemployment is increasing, but that doesn’t show the entire picture. 

The unemployment rate is the percentage of people actively looking for a job compared to the labor force participation rate (employed people plus job hunters). It is not the raw percentage of people without jobs. If you looked for a job for a year, couldn’t find one, and gave up, you would stop counting in the unemployment numbers. You are now a discouraged worker and not counted in the labor force participation rate. 

In July, the labor force participation rate increased from 62.6% to 62.7%. Small, yes, but it shows that people feel better about the labor market and joined the rat race. This is typically a good sign of a strong labor market.

Also, maximum employment is not defined as 0% unemployment. No unemployment indicates lack of upward mobility. There is a healthy amount of unemployment to indicate people are quitting and looking for a better job. In a weak labor market, nobody quits because they believe their current job is the best they can get. In a strong labor market, you see a small, constant unemployment percentage indicating people feel confident they can find a better job.

0 for 2 on the Fed mandates as I count them. 

The labor market is still strong, but slowing, and inflation is still above 2%. Jerome Powell is trying to execute a soft landing without causing a recession. However, a soft landing will require the economy to slow down. I think we are seeing the economy start to slow, not crash. Wilson’s opinion: keep the rates steady. 

Last comment, let's look back in history to see what happened when interest rates were cut too early. 

The Great Inflation:

• 1974 

  • Inflation: 11% 

  • Fed Average Interest Rate: 10.51% 

• 1976 

  • Inflation: 5.8%

  • Fed Average Interest Rate: 5.05%

• 1980 

  • Inflation: 13.5%

  • Fed Average Interest Rate: 13.35%

• 1981 

  • Inflation: 10.3%

  • Fed Average Interest Rate: 16.39%

Here is the take away: 

1. If you celebrate too early and cut rates at the first sign of improving inflation, you will be hit with worse inflation. If the Fed decides to cut rates, they will increase demand for items (not supply) and increase the price. Inflation will spike again. 

2. Interest rates were much higher back then… they celebrated 5% rates in 1976 while we freak out with 5% rates today. 

Yes, the 70s and 80s were much different and there were other unemployment aspects at play. Am I simplifying this too much? Yes. However, the fundamentals of economics don’t change. I hope I am wrong. I hope we don’t repeat this graph:

You can read more here and see the raw data here and here. 

Debrief on Deck

Next week, Mike jumps into another tax advantaged investment account, the Health Savings Account. It’s a fun option where you can invest in a healthcare company, then use the tax-free profits to pay that same company when they charge you $397,093 to remove a splinter!