June 23rd, 2023
After posting five straight winning weeks, bulls opted to take some gains off the table in a holiday-shortened trading week. A light week in economic news left investors to focus on Federal Reserve Chairman Jerome Powell’s semi-annual testimony to Congress. Aside from fielding questions on the Fed’s fight against inflation, Powell was asked to confirm to the House Financial Services Committee that he is indeed a longtime Deadhead (Grateful Dead fan) after pics of the central banker emerged showing him attending a Dead & Company show in Bristow, Virginia. According to the Chairman, he attended his first concert in 1973 at RFK Stadium in Washington, D.C., and continues to play Dead songs on the guitar in his free time to this day. Whether one should be comforted or deeply concerned over our nation’s leading banker feeling equally at home on Constitution Avenue or Haight-Ashbury may be a matter of debate, but Powell skillfully refocused his testimony to reiterate to Congress that the Fed’s fight against inflation is far from done. He indicated that the central bank will continue to hike rates at least two more times this year, emphasizing that the Fed had no plans to pivot to lower rates in 2023. That statement rattled markets as investors had believed that the combination of lower growth and slowing inflationary pressures would convince the Fed otherwise. Economic news was light this week with builders signaling confidence over the housing market’s recovery as homebuyers are increasingly forced to buy new homes due to the limited existing home inventory. Broader economic momentum also appears to be continuing with healthy services demand offsetting slower manufacturing output. For the week, the 500 slipped -1.40%.
Touch of Grey for the Housing Market
Summer has historically been the busiest time for potential homebuyers. However, high interest rates, high prices, and a lack of inventory has made it particularly tough to be a buyer. Sensing strong pent-up demand, homebuilders have been busy breaking ground on more homes to fill the gap. U.S. housing starts rose 21.70% in May to a seasonally adjusted annual rate of 1.63 million, their largest gain since 2016. Single-family starts rose 4.80% month-to-month to 897K, their second straight monthly increase. Building permits, a sign of future construction, rose 5.20% to a 1.49 million rate in May. Meanwhile, in the existing home market, sales were essentially flat in May compared to April and on a year-over-year basis, sales were down -20.40%. The median price for existing homes also fell, down -3.10% to $396,100. The inventory of existing homes remains incredibly tight with just 1.08 million homes on the market at the end of May. That’s equal to a three-month supply of homes. Historically, six to seven months is considered a healthy balance between supply and demand. A lack of homes on the market means the market remains highly competitive for would-be buyers. About a third of the properties were sold above their list price and were on the market for a mere 18 days. Of the homes sold in May, a whopping 74% were on the market for less than a month. Although newly constructed homes have held the competitive edge over existing homes, tighter credit conditions and fewer builder incentives heading into 2H 2023 could see this trend moderate.
Solid Service Demand Offsets Thorns in Manufacturing Outlook
Services demand continued to carry the economic load, offsetting weaker demand for goods in June. The S&P Global Flash US Composite PMI, which combines both goods and services, slipped to 53 from May’s 54.3 reading. Numbers above 50 indicate expansion while numbers below signal contraction. June’s services index, however, marked its fifth consecutive increase, hitting 54.1. Demand for services continues to look promising with new order growth remaining solid. The strength in services helped to offset the manufacturing index’s slide to 46.3, a six-month low, as production fell at the steepest rate since January. Manufacturers may also need to reevaluate their bullish outlook for 2H 2023 demand as new orders dropped at their sharpest rate since December. They cited weak customer confidence and destocking by clients. Overall, economic demand still appears strong, but the nature of that demand continues to be directed towards services over goods.
A sixth winning week for the major indexes was not in the cards this week. Throughout the spring and early summer, the market has been supported by signs of slowing inflation and moderating economic data that many investors believed would convince the Fed to pause and ultimately ease rates by the latter part of 2023. That belief was dispelled this week as Fed policymakers stepped up their hawkish comments due to lingering inflation concerns. By some measures inflation has slowed dramatically since June of 2022 when the CPI hit 9.10%. As of May, the headline CPI figure most recently stands at 4.00%. Core CPI, which excludes volatile food and energy prices, remains stubbornly high, however. Core price inflation rose 5.30% year-over-year in May – far exceeding the Fed’s 2.00% target. Equally concerning is that the core was higher by 0.40% month-over-month, showing price momentum is still strong for those items most widely purchased by consumers. Faced with a cloudier economic outlook now that rates are expected to be higher for longer, investors chose to take some of their gains off the table this week over concerns the economy “may be going to Hell in a Bucket, baby, but at least Powell’s enjoying the ride”.
The Week Ahead
It is hard to believe we’ll close the books on the first half of 2023 next week. With the 4th of July holiday weekend ahead and many folks heading off for a long weekend, Week in Review will not be published. Our next edition will return on July 7th as we pour over the latest jobs and manufacturing numbers.
Auto-matic Happiness: Stealth Wealth and the Car Industry
The U.S. car market has turned a corner since pandemic-induced disruptions resulted in nearly two years of vehicle shortages. From May 2022 to May 2023, the industry saw a 22.8% increase in sales, and, according to Kelley Blue Book data, the average transaction price was $48,528 in May 2023 which is about 25% higher than the same month three years ago during the shutdown.
If you are in the market for a new car, the good news is that industry experts anticipate prices to decline due to oversupply now that car manufacturers have been able to increase production. The bad news is that personal finance experts warn car shoppers of the perils of buying a new car which is one of the biggest depreciating assets one can own: a new car starts losing its value the moment it leaves the lot. According to U.S. News, the average depreciation for all vehicles over the first five years is 49.1%. Luxury brands can lose more value than that with the average five-year depreciation for a Mercedes S-Class at 67.1%, and for a BMW 7 Series, it’s 72.6%. Maintenance and repairs on luxury cars can also be more expensive, especially once they fall out of warranty.
A number of billionaires who could conceivably afford the nicest vehicles choose to drive relatively average cars. Call it “stealth wealth” which is having wealth but not having a need or desire to show it off, these individuals choose practicality. Mark Zuckerberg, who co-founded Facebook and has a net worth of more than $100 billion according to Bloomberg, is frequently spotted driving a Honda Fit hatchback, a mid-priced sedan. The starting price of the Honda Fit is $15,100. He has also been seen driving around Palo Alto in an Acura TSX that has a starting price of $29,610. Zuckerberg is also reported to drive a Volkswagen Golf GTI, a sporty hatchback priced at around the same as the Acura.
Amazon founder Jeff Bezos was still driving a Honda Accord well after he became a billionaire. Bezos told CBS in an interview in 1999 that the car represents his financial priorities and frugality. When asked about his vehicle of choice, Bezos said, “This is a perfectly good car.” The vehicle was estimated to cost around $17,890. Apparently, he was saving his money to buy a suborbital space tourism rocket.
Jack Ma, the cofounder and executive chairman of The Alibaba Group, China’s leading technology and e-commerce firm, has a personal fortune estimated to be nearly $40 billion. He reportedly drives a $25,000 Roewe RX5, a mid-size car manufactured by a Chinese automaker.
Warren Buffett who famously lives a frugal lifestyle drives a 2014 Cadillac XTS. He drove a 2001 Lincoln Town Car for a decade prior to auctioning it off for charity for $122,500 to support Girls Incorporated in his hometown of Omaha, Nebraska. He replaced that car with a 2006 Cadillac DTS that he drove for eight years before purchasing his 2014 model. Buffet’s daughter noted in an interview that she is the one to nudge her father when it’s time for a new car when it gets “embarrassing.” At a screening for a documentary about his life, Buffet said that it’s not that he is frugal, but that he just doesn’t think that spending money will make him happier than enjoying the simple things in life and that he doesn’t equate the amount he spends on something with the enjoyment he will get from it. Wise words from the oracle of Omaha.
Steve Ballmer, former CEO of Microsoft and current owner of the NBA’s Los Angeles Clippers, drives a Ford Fusion. Ballmer has remained loyal to Ford vehicles from his hometown of Detroit, MI where his father worked as a manager for the Ford Motor Company.
Larry Page, the former CEO of Alphabet and one of Google’s co-founders, drives a Toyota Prius. Page is one of the wealthiest individuals in the world and is reported to be concerned about the environment which is likely why he drives an electric car. He started an electric flying car company in 2015 but recently shuttered it after years of design and development work. His Prius isn’t his only car, however, and he has several Teslas and Mercedes in his car collection, and maybe some prototype flying cars in his garage as well.
Alice Walton, heiress to the Walmart fortune, is estimated to be worth nearly $50 billion but appears to take after her father’s frugal sensibilities. Sam Walton, Walmart’s founder, was said to have kept the 1979 Ford F-150 pickup as his daily driver until his death in the early 1990s. Alice drives a 2006 Ford F-150 pickup which has been the top-selling truck in the U.S. for the past 46 years and America’s best-selling vehicle for 41 years. Alice has had a series of driving accidents and is rumored to now drive a street-legal golf cart around her home in Bentonville, Arkansas.
How individuals spend, save, and think about money can influence how much joy they get from it. Having a financial plan in place and working with an advisor can help you prioritize spending in ways that promote the greatest happiness.