Straight Talk

June 17, 2024

Five Things You Missed This Week

1. “Dot Plot” Update.

Core data on consumer and wholesale inflation, released last week, showed price gains moderated further in May. The data raised investors’ hopes for interest rate cuts from the Federal Reserve later this year. But as the Fed left rates unchanged at the end of its latest policy meeting, its highly watched rate “dot plot” indicated Fed governors now only expect one rate cut this year. A University of Michigan survey of inflation expectations also rose from the previous month. Fed Chair Jerome Powell, in his post-meeting comments, seemed to make clear that the Fed will require at least one or two more months of lower-than-expected inflation data before cutting rates.

2. The Buffet Indicator.

In the current market environment, weak economic figures raise hopes of Fed rate cuts sooner rather than later. Such data tend to boost stocks. But Warren Buffett, in a 2001 Fortune article, put forth the notion of a ratio dividing U.S. stock market capitalization by U.S. gross domestic product. He surmised a figure of 70-80% might signal a good stock buying opportunity for investors. On the other hand, a figure of 200% – similar to the Dot.com bubble of 1999-2000 – might offer a warning sign. Typically, the ratio has ranged from 120% to 170% in the past two decades. But it now sits at 190%, near an all-time high that indicates stocks are overvalued.

3. Falling bond yields.

Despite a 1.6% weekly gain in the S&P 500^® Index – including a 6.4% for the technology sector – bond yields fell last week. Bond investors essentially ignored Powell’s comments and the updated, aforementioned dot-plot indicating rate cuts don’t appear imminent. As a result, the Bloomberg Aggregate Bond Index rose 1.3%, almost matching the S&P 500’s gain. The gains for both indices occurred even as the diversified Goldman Sachs Commodity Index – measuring numerous commodities that often serve as a harbinger for inflation – defied the week’s subdued inflation data and surged 2%.

4. Biosimilars.

An innovative class of drug, highlighted in a recent report from Tim Lechleider, an American Century analyst, potentially could turn the pharmaceutical landscape upside down. Called “biosimilars,” they compete with more widely used “biologic” drugs. Whereas the latter get produced in labs with chemicals, biosimilars derive from living, organic sources and mimic traditional drugs. Amgen, for instance, last year created a biosimilar drug to compete with AbbVie’s Humira, a biologic drug used to treat arthritis and Crohn’s disease. AbbVie soon slashed the list price of Humira, one of the best-selling drugs in history, to defend its market share versus cheaper biosimilars. As biosimilars gain more traction with consumers, this scenario may increasingly repeat.

5. Biodiversity.

Our Sustainable Investing Team, led by Sarah Bratton Hughes, recently produced a report titled “Climate 101.” It reviewed a slew of climate-oriented issues, including the concept of biodiversity. Balanced biodiversity remains critical for maintaining our food systems and resilience to drought and disease. But in the past 50 years, vertebrate species populations have decreased by 70%. Coral reefs, natural forests and wetlands also are disappearing. This loss of biodiversity affects food production and health, and it also has investment implications more immediate than many may realize.