Market Update
Markets were on pins and needles heading into this week given all the news that was coming – a Federal Reserve meeting, the second quarter Gross Domestic Product (GDP) data, and earnings announcements from some of the largest companies on the planet. In all, we investors took the mixed bag of goodies in stride, like the weary, disillusioned lot that we have become. If this year is already a blur, this chart from BlackRock charts the largest events that have stressed economics and markets year-to-date.
On Wednesday the Fed announced an increase in the benchmark interest rate by 0.75%. Short-term borrowing rates are now 2.25%, where they sat briefly in 2019 and before that in March 2008, the early days of the banking crisis. All this to say, we are moving into levels not seen in some time, and rates are likely to go higher, given everything we know right now.
Thursday’s Gross Domestic Product data confirmed that our economy shrank by 0.9% annualized, after falling 1.6% in the first quarter. Much of the decline is because consumers are spending less and the housing market is in a slump. But the big news here is that the economy met the most commonly used definition of recession—two consecutive quarters of declining economic output. Many are saying “nope!” to the question of whether we are really in a recession. They prefer to wait for the National Bureau of Economic Research (NBER) to put in their two cents. The NBER looks at employment (still strong), manufacturing (declining), household income (growing, especially for lower income households) and GDP, before determining, usually much after the fact, if there was in fact a recession. So if not now, perhaps in the next 6-12 months, there will be a declaration. In any case, markets do not wait for such pronouncements. Investors have been laser focused on earnings calls with CEOs and pay the most attention to what the companies forecast in the next quarter or two. Many CEOs are getting high praise for their abilities to navigate the twists and turns, like Microsoft's Satya Nadella and Apple's Tim Cook. Companies are admitting that sales are slowing and costs are rising, but savvy expense management and supply chain work-arounds are keeping businesses plugging along. Perhaps the Proctor & Gamble finance chief Andre Schulten has said it most succinctly. "For us, the downturn is not yet visible. We’re also not naive, we see the pressure on the consumer.”
Stock indices have had a good month, even if volatility has still been present. On its way down to a calmer levels, the fear-factor gauge, the VIX, still spiked several times in July (see chart on right). The bond market is still flashing warning signals. The 10-year Treasury yield has fallen dramatically, down to 2.64% from over 3% last month. When yields fall, prices rise, signaling that investors are adding bonds as protection and anticipating more trouble ahead.
Our Food Dilemma
One reason inflation is expected to show a decrease when July’s data is released next month is because the price of fuel has been dropping since early June. Food, a large component of the calculation, has not been dropping. Experts say that it is difficult to say how or when prices will ease.
Overall costs in the U.S. have risen 10% from June 2021. Cereal is 15% more expensive; eggs are up 33%. Budgets are being stretched and food pantries are seeing higher demand from people looking to augment their pantries. The UN’s Food Price Index for a basket of commodities hit records this year, rising 62% in June from 2019 levels.
This is not lost on anyone and has left many families comparing notes on how much they are now spending. The USDA is in on that conversation, posting a monthly food budget guideline which divides up costs by age, gender and spending level - Low, Moderate and Liberal. A quick comparison of the charts from 2021 to today shows a jump in every category of 10-12%.
This is a global issue; the prices of wheat, flour and edible oils are increasing the fastest since the 1980s. Given that there is no one culprit, it is folly to guess when the spaghetti jumble of problems will ease.
Currently the single most significant factor is the Russia-Ukraine war. Almost no agricultural goods have been shipped from Ukraine since the conflict started five months ago. An agreement signed between Russia and Ukraine last week means that ships, some of which have been loaded but blockaded since February, will be heading out for distribution any day now. However, the deal is only good for 120 days and after that a renegotiation is uncertain.
Pandemic effects are still rippling through the food supply. Even two years later, U.S. diners still prefer to eat at home. Creating and packing food for groceries, instead of catering to restaurants, came with huge initial costs. Investments in worker training, transportation, not to mention packaging and updates to processing plants are expenses that are still working their way through the industry.
Transportation costs are ballooning due to fuel prices but also due to the severe shortage of truck drivers. Truckers move over 70% of all goods in the U.S. and are a critical part of our food chain. Without enough drivers, deliveries have become less frequent and are often delayed, which is problematic especially for the more perishable foods.
There is also a land problem. Per the U.N., 52% of all agricultural land is low quality or experiencing soil erosion leading to declining crop yields. Extreme weather events are also wrecking havoc and impacting the reliability of harvest yields.
It is a grim picture for sure but the U.N. and other global entities are hopeful. Some 60% of global food production comes from five countries with diversity in region, governance and product: China, the U.S., India, Brazil and Argentina. Working together with makers of agricultural equipment, seed and fertilizer companies, business and global leaders hope to get more food out of less land in the decade to come. An estimated 60% more food will be needed by 2050 to feed the world, which will number some 9.7 billion by then.
The great Russian plant explorer Nikolai Vavilov reasoned that crops originated in the region of the world where they, and their wild relatives, show up in greatest diversity. This map plots the center of origin and primary region of diversity for 151 different crops. (Some crops, like wheat, have more than one primary region of diversity.) ~ The Royal Society
What Are the Odds?
The Mega Millions jackpot is sitting pretty and unclaimed at $1.2 billion and growing, the second largest jackpot in this game’s 20-year history. The current run began in April and the pot, and gambling interest, have spiked the longer the big prize has gone without a winner. Because the odds of winning, a daunting 1 in 303 million, do not change throughout the course of the game, the ever hopeful are even more willing to plunk down cash.
Todd Graves, the CEO of fast-food restaurant chain Raising Cane's, bought a $2 ticket for each of his 50,000 employees, shelling out $100,000 for the second time. Live! Casino & Hotel Philadelphia bought 4,000 tickets for their employees. Plenty of other friends and co-workers are combining forces in hopes of having the six numbers line up in order to score big.
Most people play for the thrill of the “just maybe” it will be their turn because of course, someone has to win at some point. Eventually someone always does, and consistency and persistence can pay off. Just this week a Missourian won $50,000 after playing the same two numbers for over 30 years; no word on how much was spent over the years on his venture. Better off is the Michigander who won $340,000 after 15 years of using the same numbers; he had already won $250,000 several years ago with the same strategy.
For a few bucks and the chance to dream for a second, the Mega Millions is exciting, but a poor investment for millions of people. Here are some things we researched that are more likely to happen in a lifetime.
* You have a better chance of getting bitten by a shark – 1 in 4.3 million.
* You could be hit by lightning - 1 in a million.
* Your chances of dying in plane crash are 1 in 11 million.
* More hopeful are the odds that a high school senior baseball player will be drafted by the MLB, a 1 in 200, or a 0.5%, chance.
* Eight out of 10,000 high school football players will get to the NFL, odds of 0.08%.
And once more, the odds of winning the Mega Millions, today or any time, is 0.00000033%. On the other hand, for the glass is half-full crowd, you have a better chance of winning than being hit by a meteorite or getting a perfect NCAA bracket. You’ll just have to take our word on that.