Category: Press

 

By:  Colin Cheaney, CFA

Tariffs and the U.S. trade deficit have dominated headlines lately, with both equity and fixed income markets recalibrating based on future growth prospects. And what’s incredible is that market pundits finally agree on one thing for once – tariffs aren’t great for the global economy. For decades, free trade has benefited U.S. consumers and helped lower income countries grow, while allowing the U.S. to focus on investing in high value services and advanced manufacturing.

One important, yet often overlooked, aspect of the trade debate is services. While the United States has a trade deficit on the goods side of the equation, when we focus just on services, we actually run a trade surplus. Keep in mind when we hear the trade deficits referenced by the Trump administration, those generally focus solely on goods. Just because we run a goods deficit with a country, doesn’t necessarily mean we’re getting ripped off. There are two sides to every coin.

Currently, the U.S. workforce revolves around services. Almost 80% of our workforce is employed in the services sector, while the remaining 20% consist of workers in goods-producing industries. Breaking it down even further, less than 10% of Americans work in manufacturing – a massive decline since peaking in the 70s. By prioritizing services-based industries over the years like consulting, banking, logistics, insurance, and travel, we‘ve created new high paying, highly sought after jobs that help keep the U.S. economy churning.

Because most services are delivered digitally or virtually, retaliatory tariffs don’t apply directly and might not hit as hard initially, but the downstream effects resulting from lower confidence from our trading partners aren’t desirable. To target our services exports, foreign countries could tighten licensing requirements and impose bureaucratic hurdles that make it harder for U.S. firms to conduct business overseas.

Nobody knows exactly what the impact of tariffs will be, and the market uncertainty out there is real, but investors can take a little comfort in the fact that the U.S. economy doesn’t rely solely on producing goods – don’t forget about services.

By:  Colin Cheaney, CFA

The University of Michigan’s Consumer Sentiment Index (MCSI) is set to be released this Friday, with the preliminary reading having shown about a 10% decline from February. While this index has been known to be a harbinger for consumer spending in the months ahead, investors would be better off to block out the noisy headlines around declining sentiment as of late.

The MCSI is essentially a tool to get an average feel for how Americans view their current financial situation. With over 500 households surveyed each month, the questions asked revolve around if respondents think they’re better or worse off financially compared to a year ago, what they think will happen to interest rates, and if they think prices will go up or down in the year ahead.

Because consumer spending does account for over 65% of GDP in the U.S., it’s helpful to gauge the financial health of Americans, but keep in mind the index is just a formal way of consolidating opinions and our less-than-admirable forecasting skills. Things like political affiliations, media exposure, employment status, and personal debt levels all have an influence on sentiment – and they’re all unique to every one of us.

The index is an opinion, not a fact. While steps are taken to make sure the participants are representative of the U.S. population, everybody’s financial situation is different, so investors shouldn’t try to time the market based on the opinions of only 500 survey respondents.

Feelings on Main Street aren’t always the same on Wall Street. Think about what really matters for future performance of mega cap names like META and AMZN – earnings and cash flows. People might not be too happy about their current financial situation, but that won’t mean they stop scrolling Instagram or cancel their Amazon Prime subscription.

The chart above shows how over the past 10 years the Consumer Sentiment index has actually trended downward, reflecting increased pessimism, while we’ve seen the S&P 500 continue to reach all-time highs. Bottom line – the index is helpful to get a general vibe for how Americans are feeling, but the stock market just doesn’t care.

Nearshoring is reshaping the North American supply chain, driving a reconfiguration of shipping routes as manufacturers relocate closer to where the American consumer shops. While tariff uncertainties continue to influence trade, large retailers and wholesalers remain relatively insulated, functioning as pass-through entities that can absorb rising input costs while maintaining margins. Even when prices rise, people still need to go shopping for their groceries and staples. Even discretionary goods still get purchased when prices rise, though the quantity and type of good may shift. In this hypercompetitive and turbulent environment many businesses are sharpening their focus on customer retention and differentiation.

A key competitive advantage emerging from this shift is the expansion of last-mile delivery and additional consumer services. E-commerce leaders like Amazon have set high expectations with vertically integrated logistics, prompting traditional retailers and wholesalers to enhance their own delivery capabilities. Historically reliant on third-party services for shipments of groceries, home appliances, and other goods, these companies are now investing in last-mile infrastructure to improve speed and efficiency.

As last-mile delivery evolves, businesses that streamline logistics and expand direct-to-consumer services stand to gain market share. For investors, this sector presents a compelling opportunity to support enabling firms while reducing exposure to the volatility of tariff-sensitive markets.

Serving The American Consumer

While manufacturers often face supply chain challenges related to tariffs, large-scale retailers and wholesalers generally aren’t as sensitive. Wholesalers can purchase goods in bulk, leveraging economies of scale to secure lower prices, and by doing so, can negotiate favorable terms with suppliers and absorb higher shipping costs. Both wholesalers and retailers also benefit from the use of bonded warehouses, where goods are considered to still be in transit, which enable storage without immediate tariff payments. This approach provides them with flexibility in managing inventory costs and delaying the tariff impact until goods are moved into domestic markets and sold to end consumers. Firms like Walmart (WMT) can then pass those costs directly to the consumer if need be in the form of higher prices on both essential and discretionary goods.

Even if tariffs are implemented in the coming months, the major retailers and wholesalers in the U.S. will continue to sell goods to American consumers. Walmart’s recent sales outlook for 2025 sent the stock into a slump due to forecasts lower than what analysts had expected, but they still forecasted 3-4% expected sales growth in the first quarter this year. The American consumer is really hard to slow down! Regardless of the overall economic climate, people need essentials — groceries, cleaning supplies, medicine, etc. — and companies like Walmart (WMT) and Costco (COST) continue to be cost-effective options for Americans. While consumer spending may shift to lower-cost substitutes in a recession, these companies have taken precautions to dampen any worrisome investors.

While added input costs are passed on to consumers, these companies also take steps to “recession-proof” their aisles and provide options for people across the income spectrum. For example, Costco (COST) has leveraged their membership-based business model to create pricing stability for customers. Walmart (WMT) and Target (TGT) both have their own loyalty programs, and even their own private brands which have become more and more popular as people are more open to “trade down” while shopping. Recent survey data from McKinsey & Company suggests that more than 80% of US consumers believe private brands to be of equal or higher quality compared to national brands. So, while Americans are becoming less loyal to brand names and pivoting to private labels like Costco’s Kirkland Signature or Walmart’s Great Value, these chains are still able to retain customers and reward brand loyalty. The composition of goods in grocery carts may change, but where they shop likely won’t.

Building The Right Shopping Experience

With large-scale retailers and wholesalers more insulated from potential tariffs, CEOs are instead contending with how to best balance in-store sales with e-commerce sales. In Walmart’s latest earnings report, considered a bellwether for U.S. consumer trends, e-commerce sales rose 20% YoY and one third of shoppers elected for delivery times of three hours or less. Convenience, speed, and efficiency are top of mind for consumers, and retailers have had to adapt. With the share of goods purchased online continuing to increase, retailers have increasingly turned to micro-fulfillment centers, which are smaller warehouse facilities designed to stock high-demand items closer to consumers. These centers allow for quicker order processing and reduced transportation costs, ensuring that customers receive their purchases faster.

Additionally, the rise of dark stores, retail locations repurposed for online order fulfillments, has helped businesses streamline operations and reduce overhead costs. These dark stores are strategically stocked with high demand products and located in densely populated key markets to reduce delivery times as much as possible. With less foot traffic compared to traditional storefronts, it’s also much easier to implement automated sorting/ packing systems and use robots to speed up fulfillment — whether it be footwear, groceries, or electronics, expect to see more dark stores pop up in your hometown. Investors should also keep in mind the companies that enable the buildout of same-day delivery and micro-fulfillment centers — industrial REITs. Companies like Amazon (AMZN) and Walmart (WMT) collaborate closely with industrial REITs like Prologis Inc (PLD) to develop facilities integrated with cutting-edge automation systems that cater directly to their fulfillment needs.

Even with the need for local fulfillment centers and dark stores, traditional storefronts have also never been more valuable. According to CBRE Group, retail real estate has the lowest vacancies of any commercial real estate sector. It could be as simple as elevated foot traffic from flexible work-from-home schedules or the desire for an expert opinion — but at the end of the day, there’s plenty of reasons for Americans to still shop in-person. In-store shopping still far outweighs online shopping in terms of retail sales dollars. Annual U.S. retail in-store sales for 2023 topped over $7 trillion, while online sales came in slightly above $1 trillion — still a massive difference between the two shopping methods, but one whose gap will likely continue to narrow.

For reference, online sales as a percentage of total retail sales have more than doubled since 2017. So, to further protect the appeal of in-store shopping, retailers can look to promote their installation and pro-shop services. Take Home Depot (HD) for example – as the largest home improvement retailer in the U.S., its earnings are closely tied to housing activity, but even if home sales slow it can still benefit from DIY home renovations by existing homeowners. Offering an expert opinion on drywall installation or paint jobs still has its perks. Either way you slice it; the large retailers have plenty of resources at their disposal to adapt to evolving consumer spending patterns down the road.

Delivering The Goods

With that being said, last-mile delivery is now the name of the game. Companies like DoorDash (DASH), Instacart (CART), and Uber (UBER) dominate last-mile delivery for grocery stores, restaurants, and even convenience stores, but how do the larger players make it happen? Costco, for example, has embraced partnerships with Instacart to offer same-day grocery delivery, allowing members to receive bulk goods without visiting physical warehouse locations. By leveraging these networks, stores can scale their delivery operations without maintaining an extensive fleet of delivery vehicles, making the process both cost-effective and able to comply with consumer expectations.

Even without scale, smaller retailers have options. Walmart’s home delivery service, GoLocal, has gained significant traction and recently announced integration into IBM’s Sterling Order Management system. IBM customers can now access the delivery service through their order management system and greatly reduces the friction for accessing GoLocal’s same-day delivery options. The gig economy drivers within GoLocal’s network are able to deliver goods from places like Home Depot to Sally Beauty, meaning traditional storefronts have almost become their own makeshift warehouses.

On the flip side of that coin is a retailer like Amazon. While the e-commerce giant used to rely on partnerships with the likes of FedEx, UPS, and USPS, the scale at which it’s grown has allowed for the build out of its in-house logistics network to get orders from their distribution centers to the end-consumer. Amazon offers both independent contractor work called Amazon Flex and third-party businesses called Delivery Service Partners for package deliveries, in addition to having their own employees drive their fleet of more than 20,00 electric delivery vans and counting. Reducing the distance between inventory and their customers has also been enabled by their same day delivery centers where fulfillment, sortation, and delivery are all vertically integrated. Besides Whole Foods, Amazon doesn’t have its own stores, so to compete with the likes of Walmart and Target, faster deliveries are the key to customer loyalty.

Investing In The Future

With major players having leveraged third-party services, while also expanding their own logistics networks, it will come down to who can offer the fastest delivery at the lowest cost. To achieve lower costs while not sacrificing quality of service, automation stands to take a front seat in the buildout of last-mile delivery. Drones and driverless cars have quite an opportunity ahead, but the upfront capital investment required will be substantial, meaning partnering with large-scale retailers or third-party delivery services has been common especially during this initial buildout phase. Certain cities like Los Angeles have already seen an increased acceptance of robotics for food delivery thanks to Serve Robotics Inc (SERV). The company’s partnership with Uber (UBER) introduced autonomous sidewalk delivery robots to bring down the all-in costs of ordering food online. Noteworthy is that without having to tip the robot, customers feel like they’re saving money which can lead to a stickier customer base.

Artificial intelligence, outside of robotics, is also transforming last-mile delivery by making routes more efficient and cutting input costs. Predictive analytics allow businesses to foresee demand spikes and allocate resources properly, in turn avoiding costly delivery delays. Embedded AI in third-party delivery services can examine traffic patterns, weather, and roadblocks to recommend the quickest delivery routes and lead to smarter navigation over time. Time is of the essence in last-mile delivery, so every second counts. While AI is already being used in proprietary logistics operations, the next step is to implement at the ground level, meaning equipping delivery drivers with the latest IoT technology to further enhance delivery data collection and overall efficiency. Amazon has reportedly been developing smart glasses for its drivers to assist with road navigation and even navigating hallways in commercial buildings for drop offs. From where we stand today, wearable tech will likely be adopted first by employees like delivery drivers, as there’s more of a use-case compared to the typical American consumer.

Checking Out

Retailers and wholesalers are navigating a rapidly evolving supply chain landscape, balancing the impacts of nearshoring, tariff uncertainties, and shifting shopping preferences. While they can pass through costs associated with tariffs or inflation, their competitive advantage increasingly depends on last-mile delivery innovations and expanded consumer services. The competitive landscape demands investments in logistics, automation, and micro-fulfillment centers to transforming how goods reach customers quickly and efficiently. As e-commerce continues to grow, the retailers that present the best investment opportunities are those who best integrate technology, delivery networks, and in-store experiences to solidify their market dominance.

By:  Colin Cheaney, CFA

With the release of January’s CPI figures on Wednesday, inflation has proved stickier than expected. But which inflation gauge is actually worth paying attention to? The US Consumer Price Index (CPI) and Personal Consumption Expenditure Index (PCE) both have an underlying basket of goods and services used to calculate their indexes, but the main difference lies in how those items are weighted.

There’s a reason the Fed prefers the PCE index – it’s backed by hard data. When calculating the weights assigned to each good and service in the index, actual spending data gathered by the Bureau of Economic Analysis (BEA) is used, rather than annual survey data used in calculating the CPI, to determine what percentage of people’s paychecks gets spent across healthcare, groceries, gas, capital goods, etc.

Generally speaking, core PCE will run cooler than core CPI. The core figures exclude volatile food and energy prices and give a better feel for actual price increases across the economy. PCE recognizes that people substitute cheaper goods when prices rise and will update its underlying basket monthly, while CPI’s basket of goods and services is relatively constant with weights updated on an annual basis.

It’s important to note that just because PCE is less than CPI, doesn’t mean inflation should be downplayed. Nobody likes making substitutions when spending, so inflation will still hurt when CPI is high, even if it’s PCE that represents the real ability for people to get by.

While the headlines are talking about CPI, keep in mind that the Fed’s decision on interest rates, which affects everything from your credit card rates to mortgage rates, will depend more on the PCE print scheduled to be released on February 28th.

 

Taking a look at the May 2023 market outlook, IHT Wealth Management examines the recent banking challenges, labor market, and areas of opportunity for investors.

May 2023 Market Outlook for Banking Sector

As many saw in the headlines, the banking sector faced massive issues over the last few months. However, the big banks with the highest risk and worst operational execution have already been dealt with. Particularly, First Republic and Silicon Valley Bank both had unique circumstances that do not reflect the broader health of the banking system. Furthermore, while First Republic did not get closed until weeks later, it suffered the majority of its damage in the first few days of the banking crisis.

On the other hand, most of the other regional banks reported much smaller deposit declines and fewer liquidity issues. Generally speaking their deposit bases are have more insured depositors and face fewer concentration risks. Down the road, some of these regional banks may face issues generating high earnings, but the immediate liquidity issues are behind us.

May 2023 Market Outlook for Labor Market

The broader market faces recession risks as rate hikes and a pull-back in bank lending impact the American Consumer. At this point, a recession is nearly certain. The question is less whether “if” it occurs and more so pertaining to its magnitude. Will this trigger a hard landing or a soft landing?

Right now the job market is exceptionally strong, paving the way for a soft landing. However, if the banks start to be too restrictive in issuing new credit and the labor market starts to crack then the risks of a more severe recession elevate. The debt ceiling is also a concern. Historically the politicians have always come to an agreement, even if it comes at the eleventh hour – but the deliberating and time wasting does not inspire confidence for the markets.

Safety Bid for Tech and Stance on Energy

Technology is becoming a safe haven. Sector cash flows are exceptionally strong and most companies carry little debt, limiting the impact of interest rates. Furthermore, most of the tech sector has ample room for margin improvements.

Emerging markets look interesting – they are ahead of the United States in the battle against inflation. In fact, many South American countries are now pivoting towards rate cuts rather than rate hikes. China reopening after Covid is also significant.

Finally, energy is another space we are monitoring. While it is exceptionally volatile, companies in the space have become much more disciplined allocators of capital and have generally become much more shareholder friendly.

Watch the full interview on YouTube.

To reevaluate your inflation strategy in 2023, contact the financial advisors at IHT Wealth Management.

When discussing 2023 inflation trends, we first take a look back at the Federal Reserve’s recent moves regarding interest rates. Last month, the Federal Reserve raised rates by 25 basis points. This stepped down from 50 basis points in December. However, the latest strong batch of economic reports suggest that 50 basis points returned to the table.

Examining the Future Beyond 2023 Inflation Trends

Regardless of whether the Federal Reserve raises rates by 25 or basis points, investors need to ask themselves about where the United States economy will head over the course of the next 6-12 months. Furthermore, what does the terminal rate look like for interest rates? Will it be 4.75%, 5.0%, or 5.25? Currently, any of these numbers is in play. Additionally, most fixed-income investors should feel capable of handling these rate increases.

However, in the event that the Federal Reserve feels the need to increase the federal funds rate beyond 5.25%, this causes greater challenges for investors and the United States economy as a whole. Rates at 6.0% and 6.25% create more cause for concern.

Understanding the Federal Reserve’s Inflation Strategy

This past week, the Produce Price Index, inflation figures, and consumer spending figures came in stronger than anticipated. For instance, the Producer Price Index rose 0.7% month-over-month in January. This exceeded the 0.4% increase consensus forecast. Ultimately, this data does facilitate concerns over the “stickiness” of inflation.

Overall, the Federal Reserve’s hands are somewhat tied. Not only are they combatting inflation, they are dealing with expectations of future inflation as well. Food prices, fuel prices, and other volatile market sectors contribute to higher inflation expectations. In another example, housing prices facilitate further inflation. Since the Great Recession, the United States dealt with a shelter shortage. To make matters worse, raising interest rates further increases prices related to home construction, skilled labor, and material costs.

Best Practices for Dealing with 2023 Inflation Trends

Despite these challenges, inflation will eventually come down. At present, the economy is facing a lag effect from the Federal Reserve’s periodic rate increases. Even by the end of 2023, it is unlikely that the Federal Reserve will begin to cut interest rates due to this lag effect. Crucially, the Federal Reserve wants to “beat” inflation the first time around, as opposed to pausing or scaling back interest rate hikes only to redo them later down the road.

In the meantime, the bond market should see plenty of activity, making banking stocks and investing vehicles attractive. Simply put, they do not face the same wage pressure that other sectors, like restaurants and bars might. As for the ongoing concerns regarding the tech sector, this market segment proved time and time again to find new ways to drive margins, even in tough times.

Watch the full interview on YouTube.

To reevaluate your inflation strategy in 2023, contact the financial advisors at IHT Wealth Management.

IHT article in Forbes: get the full article here

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IHT article in Forbes: get the full article here

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IHT article in Forbes: get the full article here

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Who’s competing in the streaming industry? Steve believes there is only room for 4 companies in the ring. Tune in to hear about Steve’s prediction for the winners and losers of streaming services.

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