The Fed Hits Pause

By Matthew Gutierrez, Shawn O'Malley, and Weronika Pycek · September 20, 2023

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?? We knew Starbucks had many options, but it’s getting out of hand: A Bloomberg analysis found that the chain’s sprawling menu of customized drinks adds up to more than 383 billion possibilities.

Starbucks’ CFO has acknowledged the burden on its hourly workers, saying: “I feel bad for the person who has to make it.”

Now, Starbucks is investing billions to streamline its operation and make the complex drinks — squirts, shots, cold foams, and all — a quicker process. Said the CFO: “It’s the biggest overhaul we’ve ever had.”

On that note, we’ll take a venti iced latte with steamed almond milk, syrup, caramel drizzle, whipped cream, and extra cinnamon powder ??

— Weronika, Shawn, and Matthew

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• The Fed’s latest interest rate decision
• Disney doubles investing in parks and cruises
• Why the SEC could crack down on aggressive labels

All this, and more, in just 5 minutes to read.

POP QUIZ

What is the median tenure for a CEO in the S&P 500? (Scroll to the bottom to find the answer!)

CHART OF THE DAY

IN THE NEWS

?? The End is in Sight for Higher Interest Rates

Could it…could it finally be over? Maybe.

Today’s biggest market story is undoubtedly that. After subjecting the economy to well over a year’s worth of interest rate hikes, the Federal Reserve may finally be done hiking. And if not now, then soon.

• That’s right, in regards to raising rates enough to tame inflation, Fed Chairman Powell commented, “We’re fairly close, we think, to where we need to get.”

Time for a break: That’s a big deal for stock investors, bond investors, bankers, car salespeople (and car buyers), real estate agents (and home buyers), and almost every other corner of the economy and financial system.

• All of which are directly or indirectly influenced by interest rates (which represent the ‘price of money’ or, more specifically, the cost of borrowing money.)
• It’s no surprise, then, that all eyes were glued to Powell’s press conference today outlining the Fed’s decision to pause rate hikes.
• Powell noted that the Fed will “proceed carefully,” continuing to process new data about the economy, as it tries to bring inflation closer to normal levels around 2%.

Why it matters:

Financial markets are forward-looking, and everyone always tries to determine what comes next. Some are already thinking about lowering interest rates.

Too soon to cut? Powell did leave the door open to rate cuts — a dramatic move usually made to counter a recession.

• Heading into 2024, Powell suggested “the time will come at some point, and I’m not saying when,” to cut interest rates.
• While that’s not a decisive statement, it becomes more interesting after considering that the Fed’s “dot plot” (a collection of predictions from Fed leaders) anticipates interest rates to be 0.5% lower by year-end 2024.

One can guess whether that’s because inflation falls back to 2% while the economy remains healthy, prompting the Fed to gently lower rates, or whether the anticipated cuts are due to a recession.

• At the moment, it’s a contentious topic amongst economists and Wall Streeters alike.
• And rate hikes may not fully be done yet in 2023. 12 of 19 Fed officials have said they favor at least one more hike this year, presumably before holding steady or cutting in 2024.

READ MORE!

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??? Disney To Double Its Investment In Theme Parks & Cruises

“The most magical place on earth” wants to add more magic.

Disney plans to allocate about $60 billion toward expanding its theme parks, cruise lines, and resorts over the coming decade, nearly doubling its investment in one of its main profit drivers.

• The company might incorporate themes from "Frozen" at the Disneyland Resort and create a real-life Wakanda from the "Black Panther" series.

With over 1,000 acres of undeveloped land at its disposal, Disney has ample room to expand its parks to accommodate its annual global visitor count of more than 100 million. The company also wants to introduce more cruise ships and establish a new home port in Singapore.

$$$: In recent years, Disney has implemented major adjustments to its theme parks, including increasing ticket prices, introducing pricey add-ons, and raising the cost of concessions to boost revenue per visitor.

• But the changes have irritated some patrons, particularly those with annual passes, who say the parks have become too expensive.

Between the lines: Last quarter, Disney saw a 13% rise in revenues for its parks, experiences, and products segment, largely driven by better performance internationally than at home (while everyone in the U.S. seemingly went to Europe this summer).

Why it matters:

In the past three quarters, the parks division's operating income has outperformed the traditional linear TV business by several hundred million dollars.

Finding the magic: The announcement highlights a continuing transformation in Disney's business strategy. For years, the company primarily depended on revenues from its conventional cable TV operations to fund high-risk ventures, such as the 2019 launch of the Disney+ streaming service.

• With increasing cable TV users opting to cut the cord, Disney's television networks — encompassing ESPN, ABC, FX, and more — are beginning to yield reduced profits.
• This shift pushes the company to lean on its theme parks as its main revenue driver, especially with the writers’ and actors’ strike weighing on content production for Disney+.

READ MORE!

MORE HEADLINES

???Musk’s Neuralink to start a human trial of brain implant for paralysis patients

?? The 15 happiest places to live in the U.S.

?? FTX sues Sam Bankman-Fried’s parents

? Gas prices approach $6 per gallon in California

?? American Airlines demonstrates a cheap way to fight global warming

?? Fund Industry Braced For SEC Crackdown

They say we shouldn’t judge a book by its cover. And maybe we shouldn’t judge an investment fund by its name, either.

The world’s biggest investment firms will get stricter rules for naming funds after the U.S. Securities and Exchange Commission (SEC) said many are misleading.

Coming soon: the most sweeping overhaul for fund-labeling rules in more than 20 years, particularly to stop firms from misleading investors about environmental, social or governance (ESG) investments.

• Regulators are concerned about firms that use buzzwords to entice investors and make their funds look more appealing. To some, the thinking went like this: Got a new fund? Slap the ESG label on it and tack on a higher fee.
• Not anymore: “These final rules will help ensure that a fund’s portfolio aligns with a fund’s name,” SEC Chair Gary Gensler said Wednesday. “That benefits investors and issuers alike.”

The new SEC rules will apply to funds with trillions of dollars in assets combined, affecting ESG labels and thematic investment strategies with labels like “growth” or “value.” The fund must invest 80% of its assets in line with the focus.

• Another example: If a “small-cap” fund’s investments (usually targeting companies worth less than $2 billion) outgrow the strategy and become mid-cap companies, they must sell them in 30 days.

Why it matters:

The SEC has already been cracking down on misleading labels. Last year, Goldman Sachs paid $4 million to settle claims that its asset-management unit didn’t weigh ESG factors in some of its products.

And a Bank of New York Mellon Corp. unit paid $1.5 million to settle allegations that it falsely implied some mutual funds had undergone an ESG quality review.

• Fund managers pushed back against the enhanced regulation, saying it violates free expression and restricts stock selection.
• But one industry observer who lobbies for increased investor protection says it’s a long overdue rule. “Investors often rely on a fund’s name when making investment decisions.”

Broader trend: Some onlookers have complained that Gensler enacts regulations, particularly in the ESG and crypto industries, at "a breakneck pace" without giving enough opportunity for feedback from the public.

• But Gensler said that although he’s proposed dozens of rules, the SEC is approving them more slowly than his most recent predecessors.

READ MORE!

TRIVIA ANSWER

The median tenure as a CEO for an S&P 500 company has fallen to 4.8 years. In 2023, it was about six years, but the median has fallen 20% in the past decade.

SEE YOU NEXT TIME!

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