Will the Fed’s Inflation Cure Trigger a Hard Landing? | Kanebridge News
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Will the Fed’s Inflation Cure Trigger a Hard Landing?

Fri, Nov 11, 2022 8:33amGrey Clock 2 min

In our post pandemic economy, all eyes are on the Federal Reserve and the tools at its disposal to unwind the effects of the unprecedented Covid-era stimulus. Fed Chairman Jerome Powell and his cohort face a formidable challenge as they try to cure one economic ill (high inflation) and prevent another (recession) when the treatment for one is contraindicated for the other.

For now, Powell has made his choice: fight inflation by raising interest rates and reducing the emergency-sized Fed balance sheet to intentionally slow the economy and inhibit consumer demand. In effect, the Fed is administering high doses of inflationary chemotherapy while trying to avoid the significant side effect of a ravaged economy. As Powell put it in a July 27 press conference, “We’re trying to do just the right amount, right? We’re not trying to have a recession. And we don’t think we have to.”

What are the odds of this approach working? Historically, the Fed’s success rate in fighting inflation while avoiding a recessionary “hard landing” has been mixed. The Wall Street Journalfound that of the previous 11 battles the Fed has fought against inflation, six produced “soft landings,” where inflation and economic growth were reduced without causing a recession.

So it is possible. But interest rates are rising at the fastest pace in U.S. history. Add to that the slowdown in GDP growth, record debt, and rising geopolitical tensions, and a recession is looking dramatically more certain. Bloomberg estimates a 100% chance of one within the next 12 months.

If inevitable, a modified bright side of a recession in 2023 is that stock markets tend to bottom out ahead of recessions. Equity markets are forward-looking indicators, which means that often the worst-case scenario is priced in ahead of time. From peak to trough, the median S&P 500 drop during recessions since 1948 is around 24%—which is comparable to the lows set thus far in 2022. The S&P 500 average decline during the past nine recessions was -1.5%, and in four instances it actually generated positive returns. Timing a market bottom is nearly impossible, but by the time the doomsday scenario arrives, equities may already be headed higher.

As the market continually digests new information, it is easy for clients to lose track of the bigger picture. As ever, during volatile markets we recommend that investors avoid trying to time the market and emotional responses to short-term volatility. We advise patience and a return to investment principles such as long-term thinking, diversification, and taking advantage of market conditions to selectively tax-loss harvest and rebalance.


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The Lipstick Index Is Back

Sales of the cosmetic product are a bright spot in an otherwise bleak discretionary-goods environment

Fri, Nov 25, 2022 2 min

Masks off, lipstick index on.

In a gloomy economy, consumers might cut back on other discretionary purchases but will keep shelling out for small luxuries such as lipstick—or so goes the theory. “When lipstick sales go up, people don’t want to buy dresses,” Leonard Lauder, then-chairman of Estée Lauder who is widely credited for coming up with the so-called “lipstick index,” told The Wall Street Journal in 2001.

L’Oréal Chief Executive Nicolas Hieronimus called this out during the company’s earnings call in October, noting that a luxury lipstick or mascara is only €30, making it an “affordable treat.” Sales at L’Oréal rose 9.1% in the third quarter compared with a year earlier despite slower sales in China due to Covid-related lockdowns. Coty, maker of CoverGirl makeup, said organic sales grew 9% over the same period.

Beauty sales have also been a rare bright spot for retailers: Target said beauty category sales grew roughly 15% in its quarter ended Oct. 29 compared with a year earlier, with Ulta Beauty shops in Target tripling their total sales volume over that period.

While Macy’s namesake stores saw comparable-store sales decline last quarter, its beauty-focused Bluemercury chain saw same-store sales grow 14% last quarter compared with a year earlier. Kohl’s locations with Sephora are outperforming the rest of the department-store chain.

Of the 14 discretionary categories that market research firm NPD Group tracks, prestige beauty—products you might find at a department store or a Sephora—is the only category that is seeing unit sales growth year to date. And lipstick, which suffered during the masked-up pandemic, is making up for lost time.

Lipstick sales have grown 37% through October this year compared with a year earlier, according to Larissa Jensen, beauty industry analyst at NPD Group. That is an acceleration from the 31% growth seen during the same period last year. Lip product is the only major category within prestige beauty where sales are actually up compared with pre-pandemic levels, according to Ms. Jensen.

Cosmetic companies have also called out strong sales in fragrances, calling it the “fragrance index.” Demand has been so robust that there is an industrywide fragrance component shortage, Coty said in a press release announcing third-quarter earnings earlier this month. CEO Sue Nabi said during the call that Coty hasn’t seen any kind of trade-down or slowdown, also noting that consumers are shifting away from gifting perfume to buying it for themselves.

“A big piece of it is just a shift in what wellness means to consumers,” NPD Group’s Ms. Jensen said. “Beauty is one of the few industries that are positioned to meet [consumers’] emotional need. It makes them feel good.”

While the lipstick effect could be observed in the recession in the early 2000s, that wasn’t the case during the 2007-09 recession, during which lipstick sales declined alongside other discretionary purchases. Part of this might have had to do with category-specific dynamics.

There was a lot of newness in the cosmetic industry in 2001, including lip gloss, a relatively nascent category back then. That tailwind simply wasn’t there starting in 2008, though nail polish turned out to be consumers’ small indulgence of choice in that period. This time around, consumers may be eager to show off a part of their face that was hidden behind a mask for so long during the pandemic.

In an otherwise bleak environment for companies selling discretionary goods, those in the business of selling cosmetics look well poised to come out of the holiday season looking freshened up.


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