America’s Economic Report Card

For those of you who would prefer to listen:

The school year is nearing a close. The start of May, next week, leads to finals followed by report cards, which takes students into Summer. It’s an exciting time. It’s a stressful and scary time too. The class of 2023 will embark on their next stage of life; Hopefully prepared for whatever comes their way. June used to be that month, but for better or for worse, that month is now May. Proper preparation is the way. As the legendary voice of the Dodgers, Vin Scully, once said: “It’s the humility to prepare and the confidence to pull it off.” Those are some good words from a great man.

America has been releasing its economic report cards, both at the corporate and government levels. Earnings Season is that vehicle for Corporate America which reached the halfway point this week while the state of our nation’s Economy was released with Q1 GDP. The American Economy grew in the March quarter. It just didn’t grow as fast as expected. Gross Domestic Product increased by 1.1%. That was a steep drop from the 2.6% growth in Q4 of last year and well below the 2% estimate. But there’s no recession; Not yet.

Recession talk is still rampant. The US Economy has clearly shifted into a lower gear. But recession could very well be avoided until 2024, using the traditional definition as consecutive quarters with contracting growth. Q1 still grew. The numbers also support the case for the Fed to begin pausing its aggressive rate hike cycle sometime this Summer.

Consumer demand is still strong. It’s the engine of America’s Economy. Consumer spending increased 3.7% in the first quarter. That was a big spike from the 1% growth in the prior quarter. Americans are out and about and spending their discretionary Dollars. The Job Market is nowhere near recession levels. Job growth has outpaced layoffs. Unemployment remains at 50-year lows. Housing has stabilized after suffering from the spike in mortgage rates. Calls for a soft-landing are on the rise. For now, regarding America’s Economy, the descriptive word is “resilient,” not “recession.” Not yet.

The rate of inflation has slowed. But it hasn’t gone away. The Fed’s favorite inflation measure increased by a 4.2% annual rate. That’s the PCE (Personal Consumption Expenditure). It’s running a faster rate than the 3.9% increase in Q4 of last year. It’s going back in the wrong direction from the Fed’s desired target of 2%. That likely cemented another rate hike next week. The Market assigned an 84% probability the overnight rate goes above 5% at the Fed meeting. It’s also pricing in a near guarantee that rates get cut later in the year. The Stock Market likes that. The Bond Market does not.

Earnings Season brings report cards for Corporate America. They’re halfway through. The results have been less bad. To the Stock Market, that generally means good. But realistically, it’s not that good. Earnings keep shrinking. At the midpoint, the blended growth rate now stands at -4.2%. In other words, earnings have shrunk by 4%. But that’s better than expected since the Street estimated -6.7% when the season started. Over 80% of the S&P components that reported thus far have beat those low expectations.

There were some big names that reported this week. Of the Tech Titans, Microsoft came out the best. Google, formally known as Alphabet, had some good things to say and generally performed better than expected. Both companies emphasized their progress and future with Artificial Intelligence; There are few themes that get stocks moving like AI.

Companies provide clues and signals into consumer behavior. The Consumer drives economic activity, accounting for roughly 70% of US GDP. There were some important takeaways we found from Coca-Cola, Exxon and Amazon, which can be used as barometers for things to come.

Coca-Cola reported global sales increased 5% in the first three months of the year to $11 Billion. That beat the Street expectations for $10.8 Billion. Importantly, Coke’s total global sales volume increased 3% in the quarter. That means inflation did not account for all the revenue growth. Coke sold more drinks, which means demand remains strong. Not everyone has the pricing power like the “Real Thing.” For comparative purposes, Pepsi increased prices again, this time by 16% in the first quarter, while volumes sold shrunk. People are incredibly loyal to the Coca-Cola brand. This was a turnaround from its last quarter, when volumes sold fell slightly for the first time since early in the Covid lockdown.

Coke is everywhere. Mexico, Europe and Australia saw nice increases in addition to the USA. Coca-Cola has been a big beneficiary of the re-opening of America and beyond as people have been out and about being active. Coke is big at restaurants, resorts, theme parks and ballparks. Coke does well overseas too. That’s where Americans have flocked and are still there.

Another reason for investor optimism is the fact that the Coca-Cola Company increased its dividend for the 61st consecutive year. That’s not just paying a dividend for 6 decades; The company increased it every year since 1962. Coke’s dividend is rock solid and reliable. There’s a lot to learn about the Market and the Economy by studying Coca-Cola.

Amazon reported a solid Q1. Revenue in North America jumped 11% to $76.88 Billion. That beat the Street expectation of $75.3 Billion. International revenue came in at $29.1 Billion, well ahead of expectations of $27.7 Billion. Amazon Web Services (AWS), its cloud storage business, saw revenues increase by 16%, which was comfortably above expectations of just 13%. The problem is the growth rate keeps slowing, and this is the first time AWS has grown sub 20%. Companies keep cutting back. Management said it now expects its cloud business revenue to decline by another 5% in the current quarter. The Market didn’t like hearing that. AWS is still the fastest-growing segment for Amazon, but this is tangible evidence that companies keep cutting back on storage spending as the Economy slows.

Amazon Web Services only accounts for around 17% of the company’s total revenue. But the cloud segment is its engine for profitability. Amazon’s retail operation is still losing money as the company keeps investing for growth and taking share. It’s a competitive force that keeps disrupting traditional retail. Amazon will be a player in Artificial Intelligence. Alexa is an AI pioneer. Amazon’s next AI move will most likely be found in the cloud. AWS is where that will happen.

Exxon had a record Q1. The company reported its highest-ever earnings in the first 3 months of a year. Exxon earned $11.4 Billion, more than doubling its profits from a year ago. It didn’t beat its all-time high of $12.8 Billion, achieved last quarter. The price of Oil has remained elevated. Supplies have shrunk with Russian sanctions. Demand is staying strong with consumers active and spending. Exxon also has a track record of increasing its dividend, something it has done for 40 straight years.

Back to the Market:

There have been some serious swings of volatility of late. That’s something we’ve all sort of gotten used to. It tends to happen when there’s built-up stress in the system. The Dow and S&P ended the week marginally higher, with a series of 300+ daily Dow moves in each direction. That’s really been a theme for the last 2 years. We’ve experienced some violent moves in both directions, up in 2021 and down in 2022 with a whole lot of both in 2023. In fact, looking back to the end of April in 2021, the Dow was at 34K and the S&P was just above 4K. That’s precisely where they find themselves today.

To all of you hard-working students out there, never forget this:

“An investment in knowledge pays the best interest.”

Benjamin Franklin

Have a nice weekend. We’ll be back, dark and early on Monday.


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