Notable

• Have you enjoyed your summer vacation? Whether you’ve climbed a mountain, traveled internationally, or simply lounged in the sun with a book, one thing’s for certain: you had plenty of company. Based on data from the Bureau of Labor Statistics, even though Americans are taking more vacation this year, just 48 percent are taking all the vacation they are owed by employers.

• How much have banks suffered this year? The S&P500 is outperforming the KBW Bank Index by roughly 33 percent year to date. If this trend holds until 2024, it will be the widest Bank Index/S&P performance gap on record.¹

• The US 10-year yield is climbing and recently reached 4.3 percent—the highest level since 2007. The rise in yields is not unique to the US; in Europe, 10-year gilts (UK) and bunds (Germany) reached their highest levels since 2008 and 2011, respectively.²

• Forget the Inflation Reduction Act—Blue Shield of California is upending its approach to drug pricing, by cutting out its pharmacy benefit manager, CVS Caremark, and replacing it with a piecemeal drug supply chain system, one that relies on different companies to serve different roles. They include Amazon (for home drug delivery), Mark Cuban Cost Plus Drug Company (for low-cost medications) and a third firm, Abarca (for processing drug claims).³

• Is the AI frenzy waning? After exploding onto the scene last fall, ChatGPT’s usage declined, for the first time, in June. Not only did ChatGPT’s traffic drop by 7 percent, its “new user” count fell by almost a third.⁴

Company Highlights

• Canadian National Railway Company (CNI)
Following earnings, CNI and Wabtec announced plans to “modernize” an additional 60 locomotives, making them more fuel efficient, more powerful, and more reliable. The environmental impact of the fleet’s 110 overhauled locomotives—which are ~15 percent more fuel efficient than the industry average—is significant: according to CNI, the company will “realize up to approximately 50,000 metric tons in annual greenhouse gas emission reductions, the equivalent of removing nearly 10,700 non-electric passenger cars [from the roads]. Additionally, the modernization order will reuse or recycle approximately 11,000 metric tons of steel.”

• Henry Schein, Inc. (HSIC)
Your dentist is moving to the cloud. Use of Henry Schein’s cloud-based practice management software continues to rise as dental offices adopt more technology solutions to modernize their operations and administration. Year-over-year growth of HSIC’s cloud-based solutions was 40 percent in the second quarter.⁵

• Amazon (AMZN)
Amazon announced the expansion of Amazon Clinic, a virtual healthcare marketplace, to all 50 states—up from 32 states last November.⁶

• Vontier (VNT)
Vontier has another opportunity to leverage its preexisting relations with gas stations in California. The California Air Resources Board approved the In-Station Diagnostics (ISD) certification for Veeder-Root’s TLS-450PLUS Automatic Tank Gauge. California regulations mandate that gas stations whose throughput exceeds 600K gallons annually must have an approved ISD system, and Veeder-Root offers the only certified solution supporting all vapor processor configurations and all certified vapor recovery nozzles.⁷

On Our Minds

At the start of the year, as interest rates continued to rise, an economic slowdown and subsequent recession seemed inevitable. Yet here we are, halfway through 2023, still waiting for the inevitable: there is strong demand for labor, robust consumer spending, and a resilient housing market. Economic growth has been remarkably hardy—a truly surprising outcome given the Federal Reserve’s aggressive tightening.

The last three years have been the most unusual in a generation and have certainly informed the economy’s surprising, staid response to Fed tightening. Workers’ reluctance to return to the post-pandemic labor market is ongoing, and the unemployment rate remains low—3.5 percent—as a result.⁸ And while there have been layoffs, the bulk of them occurred in higher paying professions, such as technology, where workers are more affluent and likely to have savings to cushion the impact of unemployment. Typically, lower paying jobs in the service industry (e.g., hospitality and restaurants) are the first to disappear in a downturn, but that’s not the case today thanks to the lingering effects of pent-up, post-pandemic consumer demand. With consumer spending in July increasing at the fastest pace since the start of the year, it’s clear that the labor market’s strength is bolstering consumer spending.

The last decade’s low interest rates have also contributed—though more subtly—to consumers’ robust spending today. Typically, when the Fed raises interest rates, increased borrowing costs cause consumer spending to decrease. However, since many consumers locked in ultralow long-term interest rates before 2022, the effects of today’s rate hikes are milder and, as a result, less likely to sharply reduce consumer spending. As illustrated below, the amount of adjustable-rate household debt is at a historic low of just 11 percent.

Soft landing, hard landing, no landing . . . we may not know which narrative is correct, but we do know that the pandemic, and the Fed’s actions, are playing a part in the unpredictable market behavior of this economic cycle. In the end, it may simply end up being a timing issue: since 1968, it has taken, on average, 22 months for recessions to start after a Fed’s interest rate hike cycle begins. (In fact, 31 months separated the start of rate hiking and the beginning of the Great Financial Crisis.) Today, we are just 17 months into the Fed’s rate-hike cycle (it started hiking rates in March 2022).

1. Liz Ann Sonders/Charles Schwab
2. Financial Times
3. Wall St. Journal
4. Similar Web
5. Henry Schein Second Quarter 2023 Earnings Call
6. Amazon Clinic expands nationwide to provide messaging and video visits for common health conditions
7. Vontier press release
8. Bureau of Labor Statistics