Weekly Newsletter- Week of 6.27.2021
Fed Spooks the Market
On Friday, St. Louis Fed official James Bullard said that he expects a rate hike sooner than anticipated. This forecast prompted an immediate market sell-off to close the week. As we've mentioned in the past, the Fed is stuck between a rock and a hard place. Think about it this way: roughly speaking, the Fed only has so many options in the toolbox to impact the economy. They can change rates (Fed Funds rate), change regulations (bank reserve requirements), or they can print more money (Quantitative Easing or QE). The problem we find ourselves in right now is that rates are already so low we can’t go much lower (real rates are essentially negative), reserve requirements are also at the bottom (when the pandemic first started these were cut to zero), and we’ve already expanded the monetary baseline through QE.
What Do Rising Rates Mean For Business?
As we’re seeing a move up in rates, it makes sense that investors would shift out of the tech heavy NASDAQ and into more value based companies. But why did it the sell-off occur? It’s all about the cost of capital and the risk-free rate. Think about it this way, if you’re a new tech company that can borrow at 1%, you’re able to fund lots of new projects to generate future cash flows. In an environment with low interest rates, you can fund R&D, M&A, and other initiatives to further expand your business. Now what happens when rates rise and a company’s revenue can’t keep up with their debt obligations? Nothing good.
Retail Sales Miss, But Prices Keep Rising
This past week, we saw retail spending drop in 8 of the 13 categories for the month of May. This decline follows two straight months of stronger gains and increased retail spending. Total retail purchases dropped 1.3% in May, a much larger drop than the consensus numbers estimated.
Zooming out, we did see an increase in spending over the pandemic. However, this increase was only minor compared to the personal savings figure throughout the same time as American’s savings rose by $1.6T during the pandemic. Data around consumer spending continues to be a key driver in today’s market. The data shows that increased spending in entertainment and travel are again on the rise- this is expected to continue as spending on consumer goods looks to level off. One of the biggest concerns in regards to the spending number is that heightened price increases, due to inflation, will inevitably slow down spending.
Amazon Continues to Expand Reach
We recently reported, through our social media accounts, that Amazon will begin expanding into telehealth. “Telehealth — sometimes called telemedicine — is the use of electronic information and telecommunication technologies to provide care when you and the doctor are not in the same place at the same time.” - Tellehealth.gov
Amazon said they will begin launching virtual health pilot programs to all of their US employees, starting this summer. The new initiative is known as "Amazon Care". The eCommerce and retail behemoth has no plans to stop there- with recent initiatives in grocery, artificial intelligence, and web services, it’s hard to imagine a world where Amazon isn’t entrenched in every niche. For now, Wal-Mart is still the leading vendor by market share in grocery stores Amazon has plans to wrestle that title away from Wal-Mart by 2025.
Another Rough Week for Crypto
As of today, June 20, 2021, the entire crypto market is was down another 8-10%. We recently reported on our social media that Bitcoin was getting its first software update in over three years. Although the news initially caused the price to jump, Bitcoin continues to trade sideways. From a technical standpoint, many traders are bearish in the short-term due to a commonly referred to pattern called the “death cross”. A death cross occurs when the short term moving average (50 Day) passes under the long term moving average (200 Day). Aside from the technical analysis, BTC is still receiving regulatory scrutiny as China continues to push towards an outright ban.