Market Commentary

According to Goldman Sachs Research, half of all vehicle sales are forecast to be electric vehicles by 2035, which is great for the environment and lower greenhouse gas emissions. They further forecast that global E.V. sales will reach 73 million units by 2040, with the U.S. accounting for 14 million units. Tesla’s current estimates are that a Tesla Model 3 Long Range with a 75kWh battery pack costs approximately $21 for a full charge ($0.28/kWh) at a Supercharging station – an annual savings of $700 estimated by Tesla. That is a huge cost saving relative to the price of gas, “fueling” the adoption of E.V.s even sooner. But consumers beware, “If it’s too good to be true, it probably is.” Currently, California tacks on an additional $1.40 “per gallon” in fuel taxes and fees; the $1.40 per gallon includes 54 cents in state excise tax, 18.4 cents in federal excise taxes, 23 cents for California’s cap-and-trade program to lower greenhouse gas emissions, 18 cents for the state’s low-carbon fuel programs, 2 cents for underground gas storage fees, and an average of 3.7% in state and local sales taxes. California expects to raise $7.4 billion in budget revenue from its state excise tax to pay for road infrastructure and other government infrastructure projects. As the consumption of gas declines, so will the state and federal revenue to fund our transportation system. In 2020, Statista.com reported U.S. states and local governments collected $53 billion in gas tax revenue, and some of the top states are PA, CA, WA, IL, and NJ. Where’s the shortfall in gas tax revenue going to come from? Policymakers are already spinning their wheels, but rest assured it will likely come from an increase in the cost of your annual vehicle registration, driver’s license renewal, auto insurance, and last but not least, a tax on the energy that charges your E.V. battery and home, electricity! If E.V. savings now is too good to be true, it only means you should buy an E.V. sooner rather than later to enjoy the benefits now before they disappear.

Equity markets ended this past week and month resiliently in positive territory as the S&P 500 gained 3.5% despite concerns over the banking industry that continued to be top-of-mind after UBS acquired Credit Suisse to prevent a catastrophe in the global capital markets. The advance was fueled by weak economic indicators favored by a hawkish Fed as fourth quarter GDP was revised down to 2.7% due to lower-than-expected consumer spending. With durable orders declining by 1%, an unexpected rise in weekly jobless claims of 198,000, and the Fed’s key inflation gauge—Personal Consumption Expenditures Price index rising less than expected, Wall Street rallied on indications of a slowing economy. This flight to quality knee-jerk reaction in a rising rate environment, at least for now, was led by the Technology and Communications stocks (including Apple, Amazon, Microsoft, Google stocks) all gaining +10.0% while Financials returned -8.2% to end the month. Bond yields inverted on fears of a recession resulting in the Bloomberg US Aggregate gaining 2.54%. While Washington’s headline news will center on President Trump’s much talked about indictment for falsifying business records, Wall Street will instead pay attention to policymakers’ ability to continue to boost confidence in the banking sector as the drama of First Republic Bank (FRC) continues. Although FRC stock rose 13.2% @ $13.99 this week, it is trading -91% below its 52-week high of $171.09. As the market takes an earnings break ahead of first-quarter corporate earnings releases starting the second week of April, attention will seek to affirm the slowdown from this week’s key jobs reports, factory orders, and construction spending.

Stock buyback has become an increasingly popular choice for companies to return money to their shareholders tax-efficiently. In a buyback, the repurchased shares will go into inventory and reduce the outstanding share count in the open market, benefiting shareholders by raising the per-share value and, potentially, the stock price. In recent years, concerns have been raised about the true beneficiaries of stock buybacks. Skeptics argue that buybacks primarily manipulate the stock price and benefit the wealthy executives, many of whom get stock-based compensation or hold options on their own stock, rather than mid-class workers who play a key role in the company’s growth. They view it as a misuse of available money for short-sighted goals while giving up the potential long-term interest by investing elsewhere to boost employee benefits, and based on that, the politicians have introduced laws to propose a tax on the process, hoping to restrict or reduce the buyback actions.
However, Warren Buffett has described such critics as ‘economic illiterate’ in the recent Berkshire Hathaway annual letter and defended that stock buybacks will benefit all owners as long as they are made at value-accretive prices. It is true that in most successful cases, such as Oracle, by the end of 2020, buyback reduces the supply and shows a signal of undervalued, thus boosting the stock price in the following period of time. But while the ‘Oracle of Omaha’ strongly supports the concept, it is critical to understand the “value-accretive price” that he’s conditional on. Actually, the man explicitly stated as early as in his 2012 letter that “value is destroyed when purchases are made above intrinsic value.” One such example can be AIG, which decided to repurchase an additional $8 million of its stocks at the end of 2007 but did not save its stock price from crashing in 2008.

The Fed has announced its intention to continue raising rates to lower inflation. The model the Fed has embraced requires a reduction of the rate of growth of output to lower inflation. Raising rates is part of the effort to lower the growth rate of output. The Fed Chairman has argued real growth is too high and driving inflation. However, there are signs he has misread the state of the economy, While raising the Fed Funds rate, the Fed has brought about a reduction in the growth rate of the money supply. The current rate of growth of M2 is negative, and growth at this level is consistent with a substantial slowdown in economic activity. A sustained further reduction in the growth rate will almost certainly produce negative economic growth. Ironically, due to the SVB bailout, the Federal Reserve loosened its borrowing guidelines for banks to encourage lending and, in effect, boosted the money supply – analogous to Quantitative Easing 5.0. The year-over-year percent change for real disposable personal income has just become positive. During the period from April 2021 to January 2023, real disposable personal income declined. If the change does not remain positive, it will be difficult to sustain economic growth. In addition, stocks of companies in the consumer durables sector will likely face challenges while trying to generate growth in profits. Consumer confidence could be more robust, and the current level is consistent with the weak real disposable income data. There has been some improvement in confidence, but should the economy slow down in response to the Fed’s efforts, confidence will surely diminish. Existing home sales have declined from about 6,300,000 annually to approximately 4,000,000 over the last year. This decline is evidence that a resumption in economic growth at or near the long-term average of 3% is unlikely in the near term. Slowing housing sales typically lead to a slowdown in demand for consumer durables. If the damage from the SVB bankruptcy cannot be contained, then all bets are off.

What was initially viewed as this week’s market overreaction to Chair Powell’s congressional testimony on monetary policy was replaced by the left-field pandemonium from the collapse and FDIC seizure of Silicon Valley Bank. Although the S&P 500 sustained a major loss of 4.53% in a short period of a week, Financial stocks were shaken and dropped 8.17% by the news of Silicon Valley Bank’s fall, dropping 63% before the stock was halted from trading. Due to contagion fears, regional banks measured by KRE (SPDR S&P Regional Bank ETF) sank 16.05% in a week. In reaction to recession fears and the Fed tightening monetary policy, the bond market had the opposite reaction as yields narrowed and gained 1.2% while long Treasuries gained 3.6% during the week. It is a modest week ahead for earnings releases. As the fallout from Silicon Valley Bank continues to unfold this week, the market will tread on understanding the widespread impact to the bank’s corporate customers and many tech start-ups. Sentiment will initially focus on the CPI and Industrial Production report being released this week, but angst will likely center around the banking sector and liquidity fears until the U.S. Treasury Department reassures the market as they determine bailout options. On Sunday, Treasury, Federal Reserve, and FDIC issued a joint statement that the U.S. Government would protect all SVB’s deposits to assure the global market’s confidence in the U.S. banking system. However, special mention was made to shareholders and debtholders they will not be protected.

A recent February report from Redfin confirmed that higher mortgage rates had slowed home sales growth and even started declining home prices. This result is not too unexpected, as high inflation has forced the Federal Reserve to raise interest rates dramatically. However, recently in December, the Redfin article noted that mortgage rates at 6.36% are off the peak of 7.08%. As in the past, these housing market gyrations give color to the submarkets and cities around the nation and the relative price action in these regions. This time, the report shows that the Florida housing market has been stable for the last year, and this may be due to the continued influx of people, affordable prices, and well-known zero state income tax. On the other hand, the tech-heavy San Francisco Bay area has taken the biggest hit. The Redfin study found that the total value of San Francisco homes has fallen by 6.7% over the past year, leading all U.S. cities in declines. That said, it seems like a small price to pay in an environment of high inflation and what might be viewed as extreme interest rate hikes by the FED. In fact, most other declines were minimal and compared to the dramatic boom in housing during the pandemic, this seems surprising if not palatable.