A game of chicken with Trump and the Fed; A 'first look' at UnitedHealth; Two articles on autonomous driving that caught my eye
1) On Wednesday, the Federal Reserve once again held interest rates steady...
And to nobody's surprise, President Donald Trump didn't like the decision. As you surely know, he has been loudly pushing Fed Chair Jerome Powell to lower rates.
And as usual, Trump took to social media to voice his frustrations. Here's one of his recent posts on his social media platform Truth Social:
But Powell is resisting the call to lower rates because of the uncertainty – especially related to Trump's actions around tariffs.
This story on the front page of today's Wall Street Journal has more details: The Fed Waits Out the Tariff Economy. Excerpt:
The Fed is trying to see how the dust will settle from the aftereffects of President Trump's April 2 "Liberation Day" tariff announcements, among other policy changes. Most economists expect tariffs to lift prices over the coming months, and that is a worry for the Fed because officials still don't feel as if they completely vanquished inflation after a three-year-long fight.
"We haven't been through a situation like this, and I think we have to be humble about our ability to forecast it," Powell said.
Inflation has eased recently, but tariff effects loom. The job market shows hints of softness, though unemployment remains low at 4.2%.
In particular, Powell is concerned about "stagflation." Here's a recent New York Times article with more on the story: The Fed Isn't Calling It 'Stagflation,' but the Risks Are Rising. Excerpt:
Economic projections released by Fed officials in conjunction with their meeting showed growth slowing sharply this year, unemployment rising and inflation picking back up. That is a painful mix for the public, and a challenging one for central bankers.
The concept of stagflation, at least in the public consciousness, dates back to the 1970s, when the United States and other countries experienced a period of anemic growth and rapidly rising prices: stagnation combined with inflation.
As the article continues, the U.S. isn't currently suffering from stagflation:
Unemployment is still low, and economic growth has mostly been solid. (Gross domestic product declined in the first quarter, but for complicated reasons that masked underlying strength.) Inflation has continued to cool.
However, that doesn't mean we're out of the woods. Here's more from the NYT article:
But President Trump's tariffs, combined with broader uncertainty about his trade and economic policies, are likely to lead to faster inflation and slower growth in the months ahead, according to most forecasters.
I don't try to be a macro prognosticator, but I think there's a game of chicken going on...
Trump wants to be aggressive in raising tariffs, both to push other countries to open up their markets as well as bring more companies and jobs back to the U.S. But he knows that if he goes too far, he'll tip the economy into a recession, which he wants to avoid.
So to offset this, he's pushing the Fed to cut rates – which would stimulate the economy.
But this could also stoke inflation. And the Fed very much wants to avoid a repeat of the inflation surge in 2021 and 2022, to which it was slow to react.
My guess is that Trump will lose this war, as the Fed is largely independent of political interference.
As such, I expect rates to remain pretty much where they are. And I expect Trump will dial back his tariff threats. In such a scenario, I believe our economy – and stock market – will muddle through, with neither a boom nor a bust.
2) I had been waiting to write about health giant UnitedHealth (UNH) in the hopes that I might develop a strong opinion one way or the other on the stock before doing so...
I haven't developed a strong opinion yet. But I've been wanting to discuss the stock – so let's dig into it a bit today. I'll start with a quick look at the financials and invite readers to weigh in (as always, send me an e-mail by clicking here).
Over the past decade, UnitedHealth was an exceptional performer – rising steadily to a peak of $631 per share late last year. But since then, it has been more than cut in half – closing on Wednesday at $307.20 per share.
You can see the move in the chart below:
The stock was driven by strong, steady growth in revenue and operating profit. Take a look:
UnitedHealth's cash-flow statement told a similar story – with robust and steadily rising free cash flow ("FCF"), at least through 2023. Here's the chart of operating cash flow, capital expenditures ("capex"), and FCF over the past decade:
Turning to capital allocation, we can see that UnitedHealth spent a lot of its FCF on acquisitions, and returning the rest to shareholders via share repurchases and dividends (the stock currently yields about 2.9%):
As for the balance sheet, net debt has risen in the past few years, as the company's capital outlays exceeded FCF. But with debt equal to roughly two years of FCF, it's not at a worrisome level. Here's the chart:
Overall, I like what I see in the financials.
UnitedHealth has shown strong growth... profits and cash generation... low capex... high FCF... and lots of capital returned to shareholders.
As for valuation, today it has a market cap of about $279 billion and an enterprise value of $339 billion – this is a huge company! Analysts expect UnitedHealth to earn $22.28 per share this year, so at $307.20 per share, the stock is trading at a mere 13.8 times earnings. That's far below the S&P 500 Index.
Why have investors turned so sour on the company? And is the sell-off overdone, which would present us with a mouth-watering buying opportunity?
I'll address these questions on Monday, so stay tuned! And again, please weigh in on the stock if you have any insights – I love hearing from my savvy readers. You can send me an e-mail by clicking here.
3) I continue to follow developments in autonomous driving, which I think will be revolutionary. So I wanted to quickly pass along two interesting articles in the WSJ and NYT from earlier this week:
As a New Yorker, I'm very excited to see Waymo interested in coming here!
Best regards,
Whitney
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