The United States Doesn't Make Cents Anymore
The Markets
It was another turbulent week.
Investors cheered the end of the shutdown, pondered strong third-quarter earnings, and questioned the artificial intelligence (AI) spending spree. Some reduced their exposure to risky assets, while others bought the dip. Here are a few of the factors that influenced markets last week.
Doubts about rates. The shutdown ended, but the White House said the official inflation and employment reports for October may never be released. That makes it tough for the Federal Reserve (Fed) to lower rates. “The central bank taps federal data releases – among others – as officials mull the appropriate timings to raise and lower interest rates,” reported AFP News via Barron’s.
The probability that the Fed will lower rates in December fell to 50 percent last week from 72 percent the week before, reported Phil Serafino, Joel Leon, and Jess Menton of Bloomberg.
A loss of momentum. Momentum investing is buying stocks that are rising rapidly. For example, artificial intelligence (AI) stocks have been big winners, pushing markets to record highs. However, the lower likelihood of a rate cut had investors reassessing their value.
“The promise of lower interest rates had been a reason why many investors were willing to disregard the high valuation readings on the momentum stocks,” said a source cited by Bloomberg.
Unhappy consumers. In November, consumer confidence hit a near-record low – a reading of 50.3 on the University of Michigan’s Consumer Sentiment Index. The Index’s highest reading was 111.3 in February 2000 and its lowest was 50 in June 2022. Normal for the Index is 100, reflecting the first quarter of 1966.
Some worry that declining sentiment could hurt holiday sales. However, the chief economist of the National Retail Federation told Sabrina Escobar of Barron’s, “While sentiment does matter, over the past few years, we’ve seen consumers spend irrespective of how they’re feeling about things…I personally like to think about the consumer as being sentimentally weak but fundamentally sound.”
The Nasdaq Composite Index finished the week lower, while the Standard & Poor’s 500 Index and Dow Jones Industrial Average eked out gains. Yields on most maturities of U.S. Treasuries moved higher over the week.
The US Doesn't Make Cents Anymore
Last week, the U.S. Mint stamped its last set of pennies. It was a common-sense change that some say is long overdue. The cost to produce pennies has increased sharply, rising from 1.42 cents to 3.69 cents per penny. Ending production has the potential to save taxpayers $56 million dollars a year.
The change doesn’t mean the penny will disappear. There are more than 300 billion in circulation – although they aren’t spent often. In fact, a dearth of pennies has created problems for retail stores. “In early November, six national retailers reported that more than 1,000 of their locations were without pennies,” reported Austen Jensen on the Retail Industry Leaders Association (RILA) blog.
In a RILA survey of 25 retail chains, “Two-thirds of respondents said they are rounding transactions to the benefit of consumers when pennies are unavailable — a practice that, while fair to shoppers, is costing businesses millions of dollars as small amounts add up across thousands of daily cash transactions,” reported Jensen.
Cash is #3 in the hierarchy of spending
There are some good reasons to pay for goods with cash. For example, spending physical money can make it easier to control spending and stick to a budget. Cash also offers greater privacy. However, many consumers prefer the convenience of credit and debit cards, according to The Federal Reserve’s Diary of Consumer Payment Choice study.
“Households earning less than $25,000 per year and adults 55 and older relied more on cash than other cohorts. In contrast, adults aged 18 to 24 were more likely to pay with a mobile phone, using their phones for 45 [percent] of all payments.”
Weekly Inspiration
“Jacob thought about going home. He still had some American change, which he kept in an empty matchbox in his sock drawer, and one night, after he had finished his pancakes and jam, he took the coins out, spread them on the kitchen table, and admired the burnt sienna patina of one of the pennies, which in the candlelight was iridescent with violet and green where people’s touch had salted it.”
– Caleb Crain, author of Necessary Errors
Best Regards,
California Retirement Advisors