🚦 Inflation & The Road Ahead
What’s on the Menu 🍴
Rates have skyrocketed this year…
And many are worried they’re going to keep climbing.
So today we’re taking a look at where we think rates are headed, and why so many people will get caught off-guard.
Also, we’re diving into the IPO markets and taking a look at why part of your breakfast just got a whole lot more expensive!
Let’s chow down:
CPI, Inflation, & The Road Ahead 🚦
IPOs Falling Flat As Investors Want Better Value ⬇️
New 401(k) Rules You Need to Know Starting in 2024 ✔️
Will Soaring Orange Prices Hit a Ceiling?🍊
Today’s newsletter is a 6 minute read.
CPI, Inflation, & The Road Ahead 🚦
The Consumer Price Index (CPI) data for the month of September was released on Thursday, showing a 3.7% year-over-year average increase in prices paid by consumers.
This was roughly in line with expectations and steady from the August numbers:
There are a lot of ways to look at the inflation data…
Some economists like to strip out volatile food & energy prices, some exclude lagging shelter measures, and others focus on month-over-month changes.
It’s easy to get lost in the weeds.
Let’s zoom out and look at the big picture:
The recent uptick in the year-over-year inflation rate has some investors worried about inflation heating up again and many are calling for further rate hikes from the Fed.
We believe that is the wrong path. We knew this uptick in CPI was coming months ago, and we believe the downward CPI trend will soon resume.
The lagged shelter measure within CPI is the largest weighted component and is only just now starting a downward ascent that will continue into 2024.
Forward inflation forecasts from the bond market agree:
forward inflation data via The Macro Tourist (Kevin Muir)
While monthly CPI figures can bounce around somewhat, the general trend should be lower CPI readings over the coming year.
Post CPI release, the futures market is also now overwhelmingly predicting the Fed will leave rates unchanged:
That hasn’t stopped the bond market from pushing up long term bond yields (and long term bond prices down). The rapid rise in long term bond yields has spooked some investors:
But rising long term yields tighten financial conditions and are helping the Fed achieve their objective without the need for more rate hikes!
In the coming months we think investors will increasingly focus more on whether the economy is weakening and less on inflation.
Judging by the poor recent performance of economically sensitive stocks, as well as small cap underperformance, the market has already begun this journey.
It’s entirely possible that investors could be worried about future DEFLATION again in just a few months.
If the Fed and the bond market over-tighten into a softer economy, risk assets like stocks probably have more downside in the near term.
If the economy remains resilient as CPI softens, and the Fed backs off, then many risk assets could have substantial upside ahead.
Long story short: the CPI has been a headwind for risk assets lately, but that looks set to change soon. Will the Fed and the bond market chill out or rain on investors parade?
IPOs Falling Flat As Investors
Want Better Value ⬇️
The IPO circuit in 2023 has left a lot to be desired.
This year, investors finally started to care about valuations (said another way, they’re tired of over-paying for company stock).
Let’s look at 3 major Initial Public Offerings, and how they fared.
CAVA (Cava Group Inc):
Cava was a highly anticipated IPO. The company operates 279 restaurants nationwide with big ambitions to open hundreds more.
It has been called the “Chipotle of Mediterranean food”.
On the day it started trading, it opened up 100% above the offering price of $22 a share.
It continued to rocket higher weeks after until reality set in.
After their first earnings report as a public company, they did turn a profit.
But fears over a recession all-around have brought down CAVA’s stock price as investors weigh valuation going forward.
CART (Maplebear Inc.):
If you’ve used grocery delivery, you’ve probably used Instacart.
CART’s stock price has been in a downfall since IPO.
The market hasn’t exactly been nice to similar food delivery companies like DoorDash (DASH).
It’s possible that investors see the writing on the wall: consumer trends are shifting, and they’re worried about the sustainability of these premium services in a slowdown.
Instacart found a lot of success during the pandemic, but, the luck seems to be turning when looking at revenue growth trends in the last quarter.
When looking at 2020-2022 numbers, it looks great for them, but, investors may be seeing through the timing of their IPO reflecting the good times.
BIRK (Birkenstock Holding Ltd.):
Birkenstocks are popular sandals that have come in and out of fashion over the decades (hint: they’re IN fashion in a big way at the moment… which is probably why they’re doing an IPO).
This very new IPO has also left a lot to be desired as it has been straight down since.
While Birkenstock Holdings is a profitable company, and even free cash flow positive, it’s not inexpensive.
It’s understandable that they have higher than industry average growth rates, but, it’s still consumer discretionary in the face of a recession.
The other aspect is how the business isn’t very diversified outside of just footwear.
They seem like a prime target for an acquisition and would make a great brand to own for a company like Deckers (DECK), who owns big brands like Ugg and Hoka.
So, all in all, the IPO’s this year have just been “meh”.
But, that doesn’t mean names like CAVA or even others can’t end up being great buys if price gets cheaper (hint: CAVA is on our watchlist).
New 401(k) Rules You Need to Know
Starting in 2024 ✔️
New 401(k) Rules You Need to Know Starting in 2024
This past holiday season, President Biden signed into law a chunky $1.7 trillion government spending bill.
Tucked away inside was a $53 billion retirement package that could help you beef up your 401(k) savings.
Starting January 1, 2024, you'll be able to stash away up to $2,500 in an employee sponsored emergency savings account. The funds will be deferred from your paycheck after-tax. This isn’t a 401(k), it’s a separate account with separate rules.
The emergency savings account offered by your employer might allow company matches to go towards emergency savings vs. your 401(k).
The first four withdrawals from an emergency savings account each year are fee free.
Some companies like Delta, Best Buy, and Starbucks already offer emergency savings accounts, so ask your employer if they have a similar program.
You can also make one penalty-free 401(k) withdrawal of up to $1,000 for emergencies starting in 2024. You may owe income tax on the amount withdrawn depending on the situation.
If you're over 50, take note. Currently, you can make an extra $7,500 annual catch-up contribution. But if your wages exceed $145,000, starting in 2024 that catch-up contribution must go into a Roth 401(k). Until then, take advantage of making pre-tax catch-up contributions no matter your income.
Finally, in 2024, you'll be able to roll over up to $35,000 from a 529 college savings account into a Roth IRA for your child or grandchild. It's a savvy way to jumpstart their retirement savings if they don't use the 529 fund for college.
So raise a toast to extra retirement savings possibilities. Review these new 401(k) rules and see how you can take advantage to give your nest egg a healthy boost.
Will Soaring Orange Prices Hit a Ceiling? 🍊
The recent price surge in Frozen Concentrated Orange Juice (FCOJ) is a juicy tale worth sipping.
OJ has seen a sharp uptick, with the charts painting a narrative of citrus turned gold.
This monthly chart spanning about 40 years shows a breakout of to new all-time price highs that started in early 2023.
So, what's behind this zestful rise?
A cocktail of factors has shaken the OJ market to its core.
Weather Woes: Droughts and severe weather, including 2022's harsh hurricane season, have clipped orange production in Texas and Florida, pushing prices up.
Sparse 2023 Harvest: A lean 2023 harvest, coupled with the persistent threat of Citrus Greening disease, adds to the price spike, particularly impacting the Florida Citrus Market.
Bacterial Blitz: A bacterial outbreak, along with adverse weather, has battered Florida's orange crops. Coupled with last year’s harsh conditions, the orange juice market tightens further.
In the cyclical dance of commodities, the adage "the cure for high prices is high prices" plays out with a rhythmic predictability.
So what does this mean for OJ prices in the future?
When prices soar, it's like an open invitation for producers to pump up the volume, flooding the market with more goods.
Simultaneously, the lofty price tags may deter some buyers, cooling the demand.
As supply burgeons and demand shrinks, the prices begin their descent from the stratosphere. This self-correcting choreography is the market's natural way to find its equilibrium, where both buyers and sellers can waltz together in harmony.
It's a fascinating display of economic balance, where the commodity prices play the tune to which the market moves.
So, the next time you see prices hitting the roof, remember, a change in tempo might just be around the corner.
Food For Thought 🧠
"Compound interest is the eighth wonder of the world.
He who understands it, earns it ... he who doesn't ... pays it.”
- Albert Einstein
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DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.