This week, Senior Financial Planner Gabe Adams CFP®, MSPFP, shares the latest inflation numbers, details the incredible strength of the labor market, and reports earnings from RFA holdings Sony, Simon Property Group, and Sysco Corporation.

Transcript

Welcome to the Weekly Market Update.  This week all eyes were on the April CPI report to search for any hopeful signs of inflation cooling. I also want to touch on the continuing strength in the labor market. We heard more strong earnings reports from some of your companies, and we will get to those after turning first to the economy. 

U.S. inflation edged down to an 8.3% annual rate in April but remains close to the fastest pace in four decades as the economy continued to face upward price pressures, as we can see in this first chart. The Labor Department’s Consumer Price Index reading last month marked the first drop for inflation in eight months, down from an 8.5% annual rate in March. The decline came primarily from a slight easing in April gasoline prices, which have since reached a new high.  Broadly, the report offered little evidence that inflation was cooling. On a monthly basis, the CPI rose a seasonally adjusted 0.3% last month after a 1.2% increase in March. However the so-called Core Price Index, which excludes the often volatile categories of food and energy, increased 0.6% on the month, a sharp uptick from March’s 0.3% gain as we can see in this next chart, providing a sign of broad-based inflationary pressure. The Fed faces the tricky feat of tightening monetary policy enough to quell inflation and cool the economy without throttling growth and causing a recession. 

Last week we had several more indicators on the incredible strength of the U.S. labor market. Nonfarm payrolls rose by 428,000 which was the 12th straight month of the economy generating more than 400,000 jobs. The Unemployment Rate came in at 3.6%, as we see in this first chart, which was near a 50 year low and barely above the pre-pandemic low of 3.5%. While strong, the labor market has not entirely healed from the pandemic. We can see in this next chart that total employment is still several million people lower than it would have been without the pandemic. We know from the JOLTS survey that there are nearly two job openings for every unemployed person, so the problem is on the supply side. We can see in this next chart that the participation rate has not recovered and is still low at 62.2%. Digging a little deeper, we can see a plunge in the participation rate of those over age 55, which may indicate some continuing hesitancy to work due to the recurrence of COVID variant waves. We also know that female participation rates have not recovered, also likely due to care-giving responsibilities related to the pandemic. And while hourly wages continue to increase, as we see in this next chart, they are not doing so at a rate strong enough to attract more labor nor to beat inflation. 

Early on Tuesday, Sony, the Japanese electronics and entertainment conglomerate and a holding in the Core Portfolio, posted fourth quarter results that topped expectations on both the top and bottom lines. The company also reported that it sold more than 2 million PlayStation 5 units, bringing the total to 19 million, despite the ongoing chip shortage. For the period ending March 31, Sony generated net income of $853 million and earnings per share of 68 cents on $17 billion in revenue. The company attributed its strength to its video game and movie divisions, aided in part by the success of Spider-Man: No Way Home, while sales from its TV division were boosted by licensing income of Seinfeld and other titles. Looking ahead, Sony said it expected to be helped by the weakened yen. According to Sony, the dollar was trading at 116 yen in March compared to 106 for the prior year. Separately, Sony, which also makes TV’s, cameras and other electronics, said that it had resumed partial production at its Shanghai factory after the city went into a COVID related lockdown. 

Also on Tuesday, Simon Property Group, a holding in both Core and Defensive Portfolios, reported earnings of $2.78 which beat estimates by four cents, and revenue of $1.3 billion which beat by $60 million. Simon boosted its earnings guidance range, increased its dividend and adopted a new $2 billion stock buyback program after beating Wall Street estimates so handily as rents rise from the previous quarter. Occupancy at U.S. malls and premium outlets was 93.3% at March 31st versus 93.4% at year end. But base minimum rent per square foot of $54.14 at March 31st was an increase from $53.91 at December 31st. Simon Properties’ board increased its quarterly dividend to $1.70 per share from $1.65, while also increasing stock repurchases by $2 billion. Americans are shopping again and malls are getting healthier. 

Sysco Corporation, a holding in the Defensive Portfolio, sent it’s entire industry higher on Tuesday by smashing estimates on the revenue, earnings per share, and adjusted cash flow lines. Sysco’s CEO said the food giant’s share gains in the U.S. and International segments continue to accelerate and demonstrate the impact of their Recipe for Growth Strategy. The company is working to offset lower food sales to restaurants and hotels by cutting costs and focusing on sales to grocery stores, which are seeing stronger sales. 

So, what does it all mean?  Headline inflation came down a bit last month, but clearly inflation is still a problem. The Fed is widely viewed as being behind the curve, but they have made fighting inflation their highest priority and are moving deliberately to bring it down. The labor market continues to be very strong with excess demand while supply continues to be suppressed, most likely due to ongoing concerns about the pandemic. In the meantime, your great companies continue to grow even as the overall market pulls back due to macro concerns regarding the war in Ukraine and inflation. Weak hands are being shaken out of the market. We will continue to keep a close eye on your companies and look for new opportunities that the shake out might bring. So sit back, relax, have a great weekend, and join us next time for the Weekly Market Update. 

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