Fed Rate-Cut Hopes Fuel Festive Cheer for Stocks. Why That Won’t Last.

On a day when Fed Chairman Jerome Powell speaks, it’s a good time to marvel at how quickly the central bank’s role in pushing stocks around has changed. After the last rate hike in July, longer-term yields started creeping up on comments that borrowing costs would stay high, which pushed share prices down.

Powell and his colleagues haven’t changed their tune much, but the rapid disinflation of the past few months and the tepid outlook for growth have convinced traders that the cuts are coming. Thursday’s data on the core PCE indicator, the Fed’s preferred inflation gauge, and comments from Governor Christopher Waller that the economy is slowing have added fuel to the fire this week.

Of course, the good times may not last. There could be a real economic slump next year that helps bring down company earnings as well as interest rates. By contrast, if inflation stays sticky, interest rates might not come down at all. And it’s still possible that both the economy deteriorates and that inflation stays too hot.

There is some debate about how much the Fed is responsible for bringing down inflation, seeing as how it has happened quickly even as officials are telling us the impact of past hikes has yet to come through. But the Fed might be able to take credit for a festive December.

—Brian Swint

*** Join Barron’s ideas editor Matt Peterson today at noon for a conversation with Daleep Singh, PGIM Fixed Income’s chief global economist and head of global macroeconomic research, about investing in an era of national security turmoil. Singh is also the former U.S. deputy national security adviser for international economics. Sign up here.

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OPEC+ Extends Global Production Cuts Into Next Year

The Organization of the Petroleum Exporting Countries and its allies agreed to deepen production cuts through the first quarter of 2024. The move, announced on Thursday after a delayed meeting, will likely stabilize oil prices amid the continuing Middle East war after they have fallen since September.

• As part of the deal, Saudi Arabia agreed to extend a cut of one million barrels a day it announced in June. Russia, Kuwait, Iraq, and the United Arab Emirates will make extra reductions. The cuts are voluntary, OPEC said.

• Although such news would normally be considered bullish, some investors were confused after OPEC left individual countries to communicate their cuts. OPEC cuts meant to prop up oil prices can portend weaker-than-expected future oil demand.

• Some might be skeptical about the cuts. The market is taking a wait-and-see attitude, said Rhys Williams, chief strategist at Spouting Rock Asset Management. Roth MKM analyst Leo Mariani expects the latest production cuts to boost Brent crude prices to $87 a barrel next year.

• Brent, the international benchmark, traded just under $83 a barrel late Thursday. Other analysts also predict oil prices will rise as demand grows amid OPEC+ supply cuts. The Energy Information Administration’s latest 2024 Brent price target is $93.24.

What’s Next: Brazil, South America’s largest oil producer, plans to join OPEC+ in January, Brazil’s oil minister said, implying the country could start reducing production next year. Brazil’s rising production this year has offset the impact of OPEC’s cuts.

—Avi Salzman, Jack Denton, and Janet H. Cho

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Peltz Revives
Disney
Proxy Battle, Citing Low Investor Confidence

Activist investor Nelson Peltz revived his proxy battle with
Walt Disney
after it offered him a meeting with the board but denied his request for seats on the board. Peltz said in a statement that Disney stock has shed $70 billion of value since he quit his first proxy fight earlier this year.

• Peltz has talked with CEO Bob Iger, Trian said in a statement. But investor confidence is low, and Disney faces key strategic questions as Iger acknowledged the challenges are bigger than he first believed. Trian is seeking at least three board seats, a person familiar with the matter said.

• Disney said in its own statement that it’s moving from a period of fixing to a “new era of building.” It just added two directors to its board, Morgan Stanley’s outbound CEO James Gorman and former Sky CEO Jeremy Darroch. Board member Francis deSouza won’t stand for reelection.

• Peltz said his Trian Fund Management has $3 billion of Disney stock and that he intends to take his case directly to shareholders, seeking unspecified changes. The new directors are an “improvement,” he added, but the move doesn’t restore investor confidence or address the missteps.

• Disney on Thursday also announced a cash dividend of 30 cents a share for the second half of its 2023 fiscal year, with company chairman Mark Parker saying the dividend followed “a year of important progress for The Walt Disney Company, defined by a strategic restructuring and a renewed focus on long-term growth.”

What’s Next: Disney said it expects free cash flow to approach prepandemic levels in fiscal 2024. It is focused on four areas: sustained profitability in streaming, building ESPN into a top digital sports platform, improving the output and economics of its film studios, and boosting growth in parks and experiences.

—Liz Moyer

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Tesla’s Cybertrucks Cost More Than Expected, With Shorter Range

Tesla
delivered the initial batch of its long-awaited electric Cybertrucks to buyers, including Reddit co-founder Alexis Ohanian. It documented the milestone during an event in Austin, Texas. The $60,990 base price is higher than expected, and the vehicle’s 340 miles-per-charge maximum range is lower than expected.

• Introduced in November 2019, Cybertruck’s arrival has been delayed by what CEO Elon Musk called “insanely difficult” development and production challenges. Not painting the exterior saved money. If Cybertruck had started under $50,000, it would have cost less than the base-model
  Ford Motor
  F-150 Lightning.

• Musk said the Cybertruck’s stainless steel body is bulletproof, its windows are “rock proof,” it can tow more than 11,000 pounds, and it can accelerate to 60 miles an hour in 2.6 seconds. Rivian Automotive this week started offering a leasing option for its all-electric R1T battery electric pickup.

• Investors were also expecting a megawatt-charging technology for faster charging of up to 100 miles in 10 minutes. A Tesla video showed the Cybertruck outdistancing a Ford Motor F-350 in a truck-pull test.

• Tesla will make pricier dual- and tri-motor options first, to maximize revenue and profit. The all-wheel, dual-motor version of the Cybertruck starts at about $80,000, and the tri-motor “Cyberbeast” version starts at about $100,000. The highest-end Ford EV truck starts at about $92,000.

What’s Next: Tesla won’t produce 250,000 Cybertrucks a year until 2025. With Cybertruck, Tesla is introducing some fairly new technologies such as the unusual stainless-steel exterior and larger, cylindrical battery cells produced in-house.

—Al Root and Janet H. Cho

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European Union in Final Negotiations on AI Regulation

European Union bodies are entering the last stretch of talks over the bloc’s proposed legislation on artificial intelligence could shape the future of the AI sector and boost U.S. tech giants. The parties will come together on Wednesday to hash out a compromise over the world’s first comprehensive legal framework for AI.

• A draft of the EU’s proposed AI Act has been making the rounds since 2021 but is now in its final stages. Microsoft, Google, and Amazon will probably have to shape their approach to AI in line with the EU’s requirements.

• The European Parliament supports assigning a higher burden of regulation on foundation models, the most powerful AI systems that can be adapted to different tasks. That would probably include future versions of Microsoft-backed OpenAI’s GPT, as well as models from Google, Meta Platforms, and U.S. start-up Anthropic, which is backed by Google and Amazon.

• France, Germany, and Italy have objected to the proposed targeting of regulation at foundation models. France’s Mistral AI and Germany’s Aleph Alpha are developers of foundation models which hope to challenge the U.S. tech giants.

What’s Next: An agreement at the meeting on Dec 6. could have a big impact on the AI sector. Critics of the proposal argue it will cement the advantage of U.S. big tech companies by raising barriers to would-be competitors. A failure to reach a deal could make it difficult for the legislation to pass before the coming European Parliament elections in June 2024.

—Adam Clark

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Parents Aim to Replace Toy Gifts With Rockin’ Experiences

Beware Santa’s elves and toy makers everywhere: This year 90% of parents want to give their children experiences rather than traditional toys for the holidays, according to a survey. It’s an extension of a parenting movement that has been gaining in popularity.

• Of 2,000 parents surveyed by the early-learning app maker Lingokids, two-thirds said their children get too many holiday gifts from family and friends, and 53% feel overwhelmed by the sheer volume of clutter after the holidays. More than 60% of toys were broken or forgotten within three months.

• It may be bad news for toy companies. Toy sales are down 8% this year through September compared with the same period last year, said market-research firm Circana.
  Mattel
  CEO Ynon Kriez said recently that the global toy industry could see a mid-single-digit drop in sales for the full year.

• The National Retail Federation says consumers who celebrate the winter holidays expect to spend an average of $875 on gifts, decorations, food, and seasonal purchases, $42 more than last year. Nearly a quarter of those surveyed said they plan to give an experiential gift.

• Travel booking platform GetYourGuide found that 92% of Americans surveyed prefer experiences over physical gifts, up from 62% in 2021. Half of this year’s respondents wanted a trip, 40% a concert or show, 30% an outdoor activity, and 27% wanted a museum visit.

What’s Next: Those who do plan a trip over the holidays are planning to spend more, too. GetYourGuide found that 43% of those surveyed plan to spend $1,000 or more on travel this year, up from 35% last year.

—Janet H. Cho and Liz Moyer

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Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to [email protected].

1. Cyber Monday spending hit a record $12.4 billion as U.S. consumers snapped up online deals for toys and personal electronics, Adobe Analytics said. This is after this year’s Black Friday U.S. online sales hit what record amount?

a. $8.8 billion

b. $9.8 billion

c. $10.8 billion

d. $11.8 billion

2. A major deal in the U.S. health insurance sector could be coming together despite antitrust concerns that have scuttled other recent combinations. Which two companies are talking about joining forces?

a.
Cigna
and Humana

b.
UnitedHealth
and LHC Group

c. Cigna and
Elevance Health

d.
CVS Health
and Signify Health

3.
Amazon.com
faces a potential antitrust fight with the European Commission, which is raising questions about the competitive effect of the e-commerce giant’s $1.4 billion deal for which company?

a.
LG Electronics

b. Dyson

c.iRobot

d.
Panasonic

4. Charlie Munger, the investor and longtime friend and lieutenant of
Berkshire Hathaway’s
Warren Buffett, died this week at 99. In what year did Munger and Buffett meet?

a. 1949

b. 1959

c. 1969

d. 1979

5.
General Motors
raised its dividend 33% and announced an accelerated stock buyback, an effort to reward shareholders as it slows its investments in electric vehicles and autonomous driving. How much stock does it plan to buy back?

a. $18 billion

b. $15 billion

c. $12 billion

d. $10 billion

Answers: 1(b); 2(a); 3(c); 4(b); 5(d)

—Barron’s Staff

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—Newsletter edited by Liz Moyer, Rupert Steiner, Callum Keown