Recession Indicators, Starbucks, Home Depot, and More!
Editor’s Note: At this point, I’m not sure what day it is anymore.
Let’s get to it.
BoA’s Brian Moynihan Predicts a “Soft Landing”
Over the weekend, Bank of America (NYSE: BAC) CEO Brian Moynihan reported that the bank no longer believes that recession is an immediate threat to the U.S. economy.
According to Moynihan, it looks like the Federal Reserve has achieved its much-ballyhooed “soft landing” — in which inflation retreats to the central bank’s 2% year-over-year target without triggering a downturn in the economy.
“Our team… at Bank of America Research… does not have any recession predicted anymore,” he said.
“Last year, this time, it was a recession.”
On Sunday, Moynihan said in an interview with CBS’s Margaret Brennan of Face the Nation that the consumer spending rate is currently roughly 3% — about one-half of what it was at this point in 2023.
Although consumers are starting to feel the squeeze of high interest rates, they’re still largely positive.
“The consumer has slowed down,” he said. “They have money in their accounts, but they’re depleting a little bit.
“They’re employed, they’re earning money, but if you look at it — they’ve really slowed down.
“So the Fed is in a position they have to be careful that they don’t slow down too much.”
Moynihan warned that if the Fed doesn’t start cutting its benchmark interest rate — which has been bound in the same 5.25% to 5.50% range for more than a year now — soon, it could have a negative impact on U.S. households.
“[The Fed has] told people rates probably aren’t going to go up, but if they don’t start taking them down relatively soon, you could dispirit the American consumer,” Moynihan said.
“Once the American consumer really starts going very negative, then it’s hard to get them back.”
Currently, Bank of America is predicting that the Fed’s Federal Open Market Committee (FOMC) will enact two cuts to its benchmark interest rate this year — one at the next meeting in September, and one when the FOMC meets in December.
In 2025, the financial giant is predicting a total of four interest rate cuts.
“So we’re getting back to normal, and that’s going to take a while for people to adjust to,
Moynihan opined.
“Both on the corporate side and commercial side and on the consumer side.”
The Cure for High Prices? High Prices
Last week at a conference for economists, Federal Reserve Bank of Richmond President Tom Barkin pointed to results from many consumer-driven companies that show shoppers balking at rising prices for goods and services.
In particular, food chains such as McDonald’s (NYSE: MCD) and Starbucks (NSDQ: SBUX) have reported worse-than-expected earnings results that indicate cash-strapped consumers have decided “enough is enough.”
As a result, many of these companies are looking to offer steeper discounts or more budget-friendly offerings.
“While inflation is down, prices are still high, and I think consumers have gotten to the point where they’re just not accepting it,” Barkin said.
“And that’s what you want: The solution to high prices is high prices.”
Indeed, a slight pullback in consumer spending could very well be why inflation has been largely retreating to the Federal Reserve’s 2% target.
But at the same time, companies have come to realize that consumer demand can no longer support the high prices they’ve maintained since the COVID pandemic.
As a result, companies are no longer hiking prices, and in many cases are even starting to reduce them.
And that has led to weaker inflation growth.
That has been echoed in the Federal Reserve’s “Beige Book” — a publication summarizing economic conditions in each of the Fed’s 12 districts.
“Almost every district mentioned retailers discounting items or price-sensitive consumers only purchasing essentials, trading down in quality, buying fewer items, or shopping around for the best deals,” the most recent report said.
Home Depot Issues a Warning About the Economy
Home Depot (NYSE: HD) was a big COVID pandemic-era winner. Millions of Americans stuck at home decided to renovate or refresh their properties, creating a do-it-yourself (DIY) boom.
As a result, Home Depot’s sales increased by a record-breaking $40 billion from the first quarter of 2020 to the first quarter of 2022. That’s about nine years’ worth of sales growth at the DIY retailer’s pre-pandemic pace.
However, since the pandemic ended, consumer attention has drifted elsewhere. Either consumers have been spending money on experiences such as vacations and high-ticket concerts.
Or they’ve been reining in their spending as stubbornly inflated prices have pinched their pocketbooks.
This week, a release from Home Depot announced that the company has lowered its sales forecast for the year. According to the statement, consumers are feeling pressured by the Federal Reserve’s high interest rate policies, as well as concerns that the U.S. economy may be heading for a downturn.
“During the quarter, higher interest rates and greater macro-economic uncertainty pressured consumer demand more broadly, resulting in weaker spend across home improvement projects,” Home Depot CEO Ted Decker said.
During the second quarter, Home Depot’s sales at stores open at least one year fell by 3.6%.
That’s led the company to forecast a 3% to 4% year-over-year decline in sales at stores open at least 12 months during 2024.
Earlier, the company had predicted a roughly 1% decline.
Starbucks Fires CEO, Hires Chipotle Boss
After reporting several quarters of weak sales in its two largest markets — the U.S. and China — Starbucks has given CEO Laxman Narasimhan the old heave-ho.
In his place, the company has brought on Brian Niccol, CEO of Chipotle (NYSE: CMG).
Narasimhan took the reins of the Seattle-based coffee giant only in March 2023. He’d been handpicked by on-again-off-again CEO Howard Schultz as his successor.
Narasimhan had previously served as CEO of U.K.-based healthcare company Reckitt, as well as working for a long time as an executive at PepsiCo (NSDQ: PEP).
However, during his stint at Starbucks, the company has struggled with several major issues that have dampened demand and sales — including heightened competition from lower-cost Chinese coffee chains and boycotts due to false rumors that the company financially supports the Israeli military.
In May, Schultz was compelled to pen an open letter to Starbucks’ management and board, calling on the company to focus on its unique strengths, as well as to improve its customer experience.
“The store requires a maniacal focus on the customer experience through the eyes of a merchant,” Schultz pointedly wrote. “The answer does not lie in data, but in the stores.”
At the time, Starbucks had cut its full-year forecast after a drop-off in same-store sales surprised Wall Street and investors.
Prior to this week, Starbucks’ stock had fallen by 21% during Narasimhan’s tenure.
Shares rose on the news of his ouster.
Does the Inverted Yield Curve Still Work as a Recession Predictor?
Anyone who uses the infamous inverted yield curve as an indicator would certainly say that we’re headed for trouble.
According to data published by the Federal Reserve Bank of New York last month, a recession could be 56% due to the relationship between short-term and long-term Treasury bonds.
The larger the spread between yields on 10-year bonds (lower) and the rates on two-year T-notes (higher), the more likely an imminent recession is supposed to be.
However, this yield curve has been inverted since July 2022 — the longest stretch on record.
Take a look:
You will find more infographics at Statista
Perhaps the inverted yield curve has lost its power of prophecy.
P.S. Why are certain cannabis stocks jumping +1,000%? It has to do with seasonality…specifically, the U.S. presidential election.
It happens every four years. No matter who’s running for office. During the previous presidential election cycle, you had a chance to grab 569%… 1,020%… 2,426% and higher. Now it’s happening again, and you’ve no time to lose.
However, to find the best cannabis stocks, you need to conduct due diligence.
The good news is, my colleague John Persinos has done the homework for you. For his premium Marijuana Profit Alert, he’s put together a portfolio of the best-of-breed marijuana equities. These holdings are poised to soar during this political season. If you’re fortunate enough to own these companies, you’ll reap a windfall.
As the second half of 2024 gets underway, don’t leave money on the table. Make your move now, before the investment herd. Learn about John’s next trades. Click here.