This is a new installment of an ongoing series where the Bautis Financial team comments on hot topics in the financial industry.
The Impact of Inflation on Minimum Wage
Inflation has been a popular topic recently. For one, we’re all feeling the current consumer goods price increases in our wallet. We’ll see whether the increases are temporary or permanent. Retirees could be looking at a Social Security Cost of Living Adjustment (COLA) of 5.8% in January 2022, which would be the biggest increase since 1983. It’s interesting that the government is claiming that inflation is temporary but issuing an enormous COLA increase, but maybe it’s to make up for the paltry increases over the past 10 years.
Wages and buying power are also impacted by inflation. The last federal minimum wage increase came on July 24th, 2009 which marks the longest period in US history without an increase. Below is an interesting chart that compares today’s federal minimum wage (adjusted for inflation) all the way back to October 1938 when it was first established. A worker paid the federal minimum wage of $7.25 today effectively earns 21% less than what their counterpart earned 12 years ago, after adjusting for inflation.
Over two dozen states and several cities have raised their minimum wage, including 11 states that have adopted a $15 minimum wage.
Robinhood‘s NASDAQ Debut
Commentary by John Williams.
This week, IPO mania continued with the much anticipated arrival of Robinhood to its newest home listed on the NASDAQ. Robinhood traded for the first time on the NASDAQ on Thursday afternoon under the ticker HOOD. The online brokerage started trading near the low of its range at $38, which gave the company a market value of about $32B. It was only moments later the stock was trading at $33, an almost 10% drop from its open and a market value of about $27B.
Robinhood, founded in 2013, has seen the app’s usage increase rapidly over the years where they made trading easily accessible to the “Everyday Joe” with a cutting edge app and pioneered commission free trading, forcing the entire industry to follow suit. The app’s usage continued to surge during the pandemic with stimulus checks and down right boredom from the lock down being the top drivers.
By the end of the day, the stock price ended with an 8% decrease to $34.82 from the days open at $38. There are a few unique factors with this IPO that may have played a part in its disappointing opening day. First, employees were allowed to sell up to 15% of their stock on opening day. Employees who participate in an IPO typically will have a black out period for about 3-6 months before they can consider selling. Second, Robinhood set themselves apart by offering up to 25% of the IPO to its customers. The trading habits of its typical customer as well as the employees ability to sell, together, could have contributed to added volatility. With that said, you can not count out the possibility that the market’s view of the company’s fundamentals are not as favorable as we may thought. There could be some questions about whether or not they are debuting on on the NASDAQ at the top of their potential or if they are just getting started with growth. Only time will tell.
Federal Reserve Makes No Changes
Commentary by Kayla Waller.
An important focus this week was Wednesday’s Fed meeting and Chairman Powell’s commentary at the post-meeting press conference. As expected, no changes to rates or the Fed’s asset-purchase program were made. However, the statement noted that progress has been made toward the Fed’s goals, meaning that policymakers are getting closer to eventually tapering bond purchases.
Mortgage rates don’t follow the federal funds rate, but they are loosely tied to the yield on the 10-year U.S. Treasury and are guided by the demand for mortgage-backed bonds. The Fed has been buying those bonds but has said it would begin to reduce its purchases. If Fed comments suggest buying will continue longer than expected, then mortgage rates could fall further. On the other side, if tapering begins sooner than anticipated, rates could go higher.
Mega-Cap Tech Companies Post Strong Earnings
This week several mega-cap tech companies posted strong quarterly earnings. Google, Microsoft and Apple together make up roughly 16% of the S&P 500 index. Earnings for these companies were up over 50% from a year ago, well above expectations. Even though the economy is getting closer to being fully open, there is still solid demand for advertising spending, cloud computing and smartphones. Microsoft and Google saw a bump in their stock price post earning. Apple’s stock price was down, despite posting really strong earnings, due to the company warning that the negative effects from the global chip shortage are expected to get worse this quarter.