· Stocks, especially the tech-heavy NASDAQ, staged a rebound later in the week on the backs of strong earnings from Alphabet (GOOGL) and Microsoft (MSFT) despite signs that the economy was cooling as inflation data remained elevated. At the present, we think this is a bounce from a market that is oversold short-term and expect choppy conditions to continue.
· Investors will be closely watching the April Non-Farm Payroll Report to be released this Friday by the U.S. Department of Labor to see if the labor market is cooling or remains hot. The former will be welcome as it will allow the Fed a little wiggle room in regard to monetary policy while the latter will keep the Fed on edge as it attempts to get inflation down to its two percent target. At the present the consensus is for April payrolls to rise by 205,000 a decrease from the 303,000 posted during March and for the Unemployment Rate to remain at 3.8%.
· Investor sentiment has cooled a bit. According to the American Association of Individual Investors, bullish sentiment has fallen from 50.0% of respondents at the close of March to 32.1% this past week. We noted last week that “we remain content with our months’ long assertion that ‘we are good with the pullback as we believe it will be moderate and most likely work off the excess created as a result of the more than 25% higher move from the October 27, 2023 bottom and thus allow bullish sentiment to cool a bit.’” That sentiment has cooled quite a bit, thus allowing for investors to refocus on economic fundamentals. Keep in mind that investor sentiment is a contrarian indicator as quite often following the herd leads to losses, not gains – kind of like walking into a crowded room.
· A little more on sentiment – the proverbial “wall of worry.” Historically, the market tends to have the most potential for gain when investor worry is pervasive as they have most likely already built up cash (dry powder) on the sidelines, having previously sold. We picked the following up from Raymond James, “This is one of the most famous Wall Street truisms. I am not sure who originally said this, but it rings true through the decades. What does it mean? Simply put, it means every bull market in stocks is doubted by a cadre of naysayers. There is always a vocal group of skeptics who point out a myriad of very rational and quite possible potential events which could derail the market’s ascent. In this sense, during a bull market, stocks are said to “climb a wall of worry”. Bull markets end when the last holdout doubters finally throw in the towel, when FOMO—Fear Of Missing Out—gives in to greed and the last dollar is invested in the market. The constant drip, drip, drip of daily negative news is another brick in this massive wall of worry, which the optimists of the world try to overcome. This is an oversimplification of a very complicated process, but it holds true.”
· Despite the fact that the yield curve has flattened as the intermediate- to longer-end of the yield curve has risen thus far in 2024, as opposed to a couple of years ago, at least investors are being paid to wait. For example, the 30-day SEC yield on the iShares Core U.S. Aggregate Bond ETF (AGG), a fund whose returns closely parallel the U.S. Investment Grade Bond Market, is 4.58% as opposed to 1.77% at the close of 2021. That hasn’t stopped the fund from posting negative returns thus far this year as bond prices respond inversely to movements in interest rates. Nonetheless, as interest rates are most likely much closer to the top for this economic cycle rather than the bottom, bond funds should begin acting much better over the coming quarters.
· According to the Federal Home Loan Mortgage Corporation (FreddieMac), “mortgage rates continued rising this week. Despite rates increasing more than half a percent since the first week of the year, purchase demand remains steady. With rates staying higher for longer, many homebuyers are adjusting, as evidenced by this week’s report that sales of newly built homes saw the biggest increase since December 2022.”
· Can growth stocks produce enough earnings in order to warrant their lofty valuations should interest rates stay elevated? Some will be able. Some will not. Investors witnessed the pullback in Meta Platforms (META) this past week as the company did not fumble this past quarter earnings, but CEO Mark Zuckerberg did issue cautionary comments on the earnings call in regard to spending as the company moves to monetize AI.
· Although we don’t always agree, regular readers to our Snapshot know that we are admirers of JP Morgan CEO Jamie Dimon’s opinionated, candid personality. Having previously noted that he has a “Democratic heart and a Republican brain,” some of what he had to say this past week during an interview with the Wall Street Journal includes:
o “China imports 11 million barrels of oil a day. They’re a very complicated neighbor – their own actions are causing all their neighbors to rearm. Their GDP per person is $15,000 versus our $80,000. So we’re in a very good position.”
o “The United States cannot rely on any potential adversaries for materials essential to our national security.”
o “Think rare earths, 5G and semiconductors, penicillin and materials critical to essential pharmaceuticals, among others. We also cannot be sharing vital technologies that can enhance any adversary’s military capabilities.”
o “China says it wants good relations with the West. At the same time, Beijing continues to fuel the largest conflict in Europe since World War II. It cannot have it both ways.”
o “I’m a little worried that if Russia wins that war you’re going to see the world enter a little bit of chaos as people realign alliances and economic relationships.”
· We believe that we are in the early innings of an industrial super cycle, as a result of on-shoring and near-shoring. Investors can benefit by investing in technology, companies that utilize technologies to increase efficiencies, industrials, materials and infrastructure plays.
· There’s a big difference between a top and a consolidation. If it stalls here, we think that the overall market, including technology, will do so as part of a consolidation and not a long-term top. From the performance of the SPDR Select Sector ETFs that looks like exactly what we are getting. We are very content with this.
· Corporate news –Shares of Boeing (BA) held steady after the aerospace giant posted earnings that were better than expected and noted that their supply chains is stabilizing, this despite burning through $3.9 billion in cash during the first quarter. Given the global duopoly that Boeing is part of, shares remain worthy of watching. Google parent company Alphabet (GOOGL), in addition to posting earnings that easily surpassed Wall Street’s cautious estimates, followed suit with tech giant Meta Platforms in announcing that they were initiating a quarterly dividend. Investors responded favorably.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, April Consumer Confidence; on Wednesday, March Construction Spending and the March Job Openings and Labor Turnover Survey (JOLTS); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance March Trade Balance; March Orders for Durable Goods and March Factory Orders; and on Friday, the April NonFarm Payroll Report to include the April Unemployment Rate.
· The Q1 Earnings beat goes on. Companies of note scheduled to report this week, include – SONY Group (SONY), McDonald’s (MCD), Stryker (SYK), Eaton Group (ETN), Amazon.com (AMZN), Eli Lilly (LLY), Coca-Cola (KO), Advanced Micro Devices (AMD), Mastercard (MA), Pfizer (PFE), Qualcomm (QCOM), ConocoPhillips (COP), Amgen (AMGN), Booking Holdings (BKNG), Apple (AAPL), Novo Nordisk (NVO), Shell (SHEL) and Linde (LIN).
General Disclosure:“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
