High oil prices and interest rates weighed on sentiment this week as the U.S.-Iran war stretched into its seventh month. West Texas Intermediate (WTI) crude oil surged above $104 a barrel while inflation gauges and interest rates moved higher as markets increasingly price in a prolonged Middle East conflict. Friday brought investors some relief as WTI eased and dip buyers waded back into the market, taking advantage of four straight losing sessions. Investors now turn their attention to next week’s September rate-setting meeting to see how the Fed will attempt to navigate the tough macroeconomic environment.
Key Highlights:
- Much like a Texas heatwave, inflation shows little signs of letting up. Consumer prices rose 0.4% in August, bringing the YOY rate to 3.4%. Core CPI, excluding food and energy, rose 0.3% on the month. Although a 2.1% increase in energy prices was the primary headline driver, inflationary pressures appeared to be broad-based. Transportation services, new and used cars, and shelter all moved higher on the month. Producers also saw no let up in prices. The Producer Price Index (PPI), a measure of wholesale prices and a gauge of pipeline cost pressures, rose 0.40% in August bringing year-over-year (YOY) PPI to 5.40%. Energy once again was the main inflation driver, up 4.2% on the month.
- More sticker shock awaits consumers as WTI surged to $104+ a barrel on Thursday. Gasoline prices followed suit, rising to $4.29 a gallon after the post Labor Day holiday weekend. That was up from $4.15 a week ago and more than a dollar higher than last year. Diesel customers, however, are feeling the real sting with prices averaging $6.06 a gallon, a new all-time high. Diesel prices are now more than $2 a gallon higher from the prior year.
- Homebuyers are getting squeezed amid elevated home prices and mortgage rates. August home sales fell 2% to a seasonally adjusted annualized rate of 3.98 million. The drop came as the median home price rose 1.60% YOY to $429,100. Prices moved higher as buying remained concentrated at the higher end of the market. Homes priced above $1 million saw sales rise 3.90% month-to-month while those below $250K saw sales plunge 10%. On a brighter note, the supply of homes for sale rose to 4.9 months, the highest supply in over a decade.
Higher Oil, Higher Rates, Higher Stakes for the Fed
After four straight losing sessions, markets rallied on Friday as WTI retreated from Thursday’s highs and dip buyers took advantage of the recent market dip. Markets have been under pressure this week amid escalating Middle East tensions, hot inflation data, and a potentially more hawkish Fed emerging at next week’s FOMC meeting. Fighting sharply escalated between Washington and Tehran this week with U.S. Central Command announcing it had destroyed several Iranian crude oil tankers in response to Iran’s IRGC launching ballistic missiles towards U.S. Navy warships and U.S. targets in the Middle East. The mounting tensions sent WTI on a tear, rising to $104+ a barrel on Thursday, the highest since May. Consumers have increasingly felt the sting of higher prices at the pump with gasoline back above $4 a gallon and diesel hitting an all-time high above $6 a gallon. Needless to say, high energy prices have continued to fan inflation, pushing August CPI and PPI higher. High inflation has also led bond investors to sell bonds and push interest rates higher with the 10-year U.S. Treasury yield now hovering around the 5.00% mark. That’s led to higher borrowing costs, especially for prospective homebuyers as the popular 30-year mortgage rate rose above 7.00% for the first time in over a year.
Rising prices at the pump, higher interest rates, and a Middle East war that just won’t end have led investors to essentially throw in the towel and accept higher interest rates are on the way. Markets are now pricing in at least two interest rate hikes by year-end with an 87% chance of the first hike happening at next week’s Fed meeting. The central bank, try as it might to avoid hiking rates is essentially backed into a corner, risking its credibility and facing a skeptical and much more powerful bond market if it fails to act. We’ll get more color next week on the Fed’s plan of attack to ease inflationary pressures and keep the economy from losing too much momentum.
The Week Ahead
It’s a big week for markets as investors await the Fed’s FOMC meeting and August retail sales.
The Quiet Resilience of the American Dream
For generations, the American Dream has stood as a defining cultural promise: that the United States is a land of opportunity, freedom, and equality where individuals can rise above their circumstances through hard work and determination and build a better life regardless of their background or upbringing. While the belief in this ideal is often questioned, a recent piece in The Wall Street Journal (WSJ) argues that this foundational promise is not only far from fading, but that the American Dream is still very much alive. In the WSJ article, “The American Dream is Alive. And It’s Minting Millionaires,” readers learn the stories of ordinary people who have come from modest beginnings to build extraordinary fortunes.
The article was written by two leading economists, Owen Zidar and Eric Zwick, who share the stories of Main Street business owners who have built staggering wealth running often unglamorous businesses far from the spotlight. The stories suggest that many paths to prosperity remain open today. One example is Dick Portillo, a child of immigrants who grew up in one of Chicago’s housing projects and started his namesake hot dog stand that eventually became the largest privately owned restaurant company in the Midwest with 4,000 employees and more than 100 locations. The authors write that a single Portillo’s could generate $9 million per year, roughly three times that of a typical McDonald’s. In Zidar and Zwick’s words, Portillo is an example of what they call an “Everywhere Millionaire,” and his story is one of many adapted from the authors’ book, The Everywhere Millionaire: Who is Really Rich in America and How They Got There,” which is being published this month.
Everywhere Millionaires are ordinary people like Portillo, individuals who run businesses woven into the fabric of everyday life. These businesses include convenience stores, dental practices, truck stops, HVAC contractors, beer distributors, and more. The stories of how these entrepreneurs built their empires, seized opportunities, and pursued growth demonstrate that wealth is more attainable and more widely distributed than commonly believed. According to the authors, there are three million “Everywhere Millionaires” who are collectively worth more than $65 trillion. They are private business owners whose wealth is not only significant, but also largely invisible to the public. Zidar and Zwick write that since 2001, the number of $100 million plus business owners has more than quadrupled, adjusting for inflation. In contrast to Silicon Valley tech billionaires and Wall Street executives, these business owners fly under the radar and often escape the spotlight. Well, until their stories are published in the authors’ book.
Another example the authors share is A.B. Walters, a gutter installer for Sears who grew frustrated with the low quality of the product he was installing and started his own gutter company. Walters founded Senox Corporation which is now the largest supplier of seamless gutters in Texas with around 350 employees and worth an estimated $100 million. Zidar and Zwick also share the story of the late auto executive Larry H. Miller who took an auto parts dealership from 961st in the nation to number one within 28 months. When the company demoted Miller to make room for the owner’s sons, Miller walked out and co-founded his own auto empire with his wife, Gail. The couple turned a single Toyota dealership into the eighth-largest auto dealer group in America before selling it for $3.2 billion in 2021.
The authors share that successful entrepreneurs are not often the geniuses with Ivy League degrees that one might expect. In fact, the top 10% of test scores on the SAT become founders of businesses only 1.3 times as often of median score SAT test takers. Zwick and Zidar write that most of the entrepreneurs building million-dollar-plus businesses come from poor or middle-class backgrounds and “only about a quarter of business owners worth $5 million or more inherited their companies.” They argue that the typical path to building wealth of $10 million and up comes from owning a business, and they state that path is open in every town, in unglamorous industries, to people without fancy degrees, rich parents, or top test scores. The quiet rise of these everyday entrepreneurs reminds us that the spirit of America is resilient and alive in the hands of ordinary people working hard every day to carve out a better tomorrow.