August 31, 2024|Inflation, Oil & Natural Gas, Rent Concessions, Business failures, Growth vs. Income Investing, Super Micro Computer, Inc.(SMCI), Sprouts Farmers Market (SFM), Advance Auto Parts(AAP)

Inflation report pretty much solidifies a rate cut in September

Personal consumption expenditures prices (PCE) were right in line with expectations as they increased just 2.5% in the month of July. Core PCE, which is the Fed’s preferred measure came in at 2.6% and was slightly below the estimate of 2.7%. While both readings matched the June inflation report, I would say inflation at around 2.6% is still extremely manageable and I believe we will continue to see it trend towards the 2% target as we exit the year. With these numbers I believe we will see the Fed cut rates by 0.25% at the September meeting and then we could see one or two more cuts before the end of 2024. 

 

Will oil and natural gas disappear over the next few years?

You may think that in a few years oil and natural gas will be a thing of the past, but Exxon believes the consumption of oil will be the same in 2050 as it is today and they don’t see carbon emissions dropping until the year 2030. In the report they do see the world demand for natural gas increasing by 21% by the year 2050 while they expect the demand for oil to increase by just 2%. They do point out most of the growth for these energy sources will come from the industrial sectors to fuel manufacturing and also from chemical feed stock. Exxon does believe consumption of biofuels, solar, and wind will continue to rise, but clearly, they believe natural gas and oil are still needed to help fuel our world’s energy needs. The big loser they believe is coal as they see that energy source dropping off 39% by 2050. To help with emissions, Exxon is largely turning towards carbon capture and hydrogen-based fuels. 

 

Rent concessions are climbing at apartment complexes!

We are now well into the second half of 2024 and as we have been saying for the past couple years we believe the overbuilding of apartment buildings will eventually put downward pressure on rents. According to Moody’s, rents are up 22% since 2019 across the country and the average rent is $1750, but due to the overbuilding of apartment buildings, landlords are having a hard time maintaining the higher rents and are now starting to offer concessions such as a month or two of free rent or a discount on utilities. Some of the more creative apartment companies have come up with cash rewards or gift cards to Amazon, CVS, Target or Walmart if you pay your rent on time. Don’t get too excited about the concessions. They may sound good, but be sure you do the math to find out how much you’re really saving. One large rental company says by offering a rewards program, about 97% of the renters renewed their lease in 2024. That is well above the national average renewal rate of 65%. I do believe over the next couple of years we should see rents decline somewhat as vacancies climb and these big rental companies have to pay the loans on all the construction costs, they incurred to build these apartments. Simply put, they will need the cash flow to make their debt payments.

 

Business failures have climbed this year!

Over the past year, starting a business has not been that easy. The number of failed new businesses increased by 60% as the new business owners ran out of money. Could this be because of a slowing economy? Bad business management? Or not having enough cash to start a business? Or perhaps it could be all three?

 

Growth vs Income Investing

The fundamental goal of investing is to make money, but for most people this is broken into two phases, growth and income. During working years everyone is saving and investing money, building their nest egg so during retirement, they can stop working and begin relying on income from their assets to support them. However, it is one thing to add money every paycheck to a 401(k) for 30 years, it’s another thing entirely to withdraw money from an investment portfolio every month for 30 years without running out. During the growth phase, the swings in the market aren’t as emotionally tolling because there’s a paycheck coming in every few weeks. When that paycheck stops and you’re selling positions to withdrawing money from an account during a market decline, things can go bad quickly. Not to mention nest eggs are largest in retirement, so a small percentage change is still a large dollar swing. The average retirement lasts over 20 years, but bear markets occur about every 4 years so retirees have to endure these periods multiple times. During a bear market if positions are sold at the wrong time, if the bear market lasts too long, if too much is withdrawn, or if the investments aren’t sound, the portfolio will not have enough remaining funds to recover. Again this is not a risk during the growth phase when funds are begin added, not withdraw. To prevent against volatility risk in retirement, a lot of people shift their investments to something overly conservative, which short term feels safe, but long term will not produce the growth necessary to keep up with inflation and prevent outliving money. Before actually retiring, it is necessary to get comfortable with an investment philosophy that will continue to provide growth but will also allow sustainable withdrawals through the ups and downs of the market. Mistakes made early in retirement can result in the need to return to work or heavily reduce your lifestyle which no one wants to do after spending decades looking forward to retirement.

 

Companies Discussed: Super Micro Computer, Inc.(SMCI), Sprouts Farmers Market (SFM), Advance Auto Parts(AAP)