December 10, 2021

FAGAN ASSOCIATES WEEKLY MARKET SUMMARY – WEEK ENDED DECEMBER 10, 2021

Dennis
&
Aaron

                                    Week Ended December 17th, 2021

• Stocks moved higher this past week with the S&P 500 settling Friday at record highs as positive news regarding the relatively mild symptoms from those infected by the Omicron variant of the COVID virus turned recent bearish sentiment around resulting in broad gains.  The industry groups that led the way were those that are economically sensitive including Technology, Basic Materials and Oil & Gas.  In addition, the Dow Jones Industrial Average notched its first up week, after four consecutive weeks to the downside.

• Investors, like all people, have the tendency to draw definitive conclusions from data or events that they believe will alter the trajectory of the financial markets.  Furthermore, most of that time is spent trying to identify those issues that will help them skirt downturns in their portfolio.  If the last couple of years has taught us anything, it is that market soothsaying is an impossible task and that it is best to hitch your financial wagon (nod to Yellowstone) to the assets in percentages that historically will help you reach your long-term objectives.  For most investors, these asset classes include equities, bonds, publicly traded real estate trusts and to a much lesser small extent, cash.  At Fagan Associates, together with each client, we establish a range of percentages in each of the above asset classes that conforms to the long-term needs of the client and when necessary, work at the periphery tweaking those percentages in response to fluctuations in the market or when the specific needs of the client change.  If history has taught us anything, there is no better way.  There is no magic bullet.

• The Dow Jones Industrial Average (+0.60%), S&P 500 (0.95%), NASDAQ Composite (0.73%) and U.S. Total Market Index (0.71%) all closed higher during Friday’s trading, this despite an 0.8% (6.8% y/y) jump in retail inflation as measured by the Consumer Price Index (CPI).  Moreover, the yield on the 10-year U.S. Treasury Note barely budged, moving down to 1.48% from Thursday’s 1.49% closing yield.  Perhaps the bond market is telling us something.

• Beware of year-end machinations in the stock market as both professional and retail investors alike are realizing losses to offset any previously realized capital gains.  This results in heightened volatility, but potential opportunity for some companies.

• Despite Oil & Natural Gas prices coming down over the past several weeks, the stocks within the industry group are rallying.

• If the balance of power in the labor market continues to favor the employee as opposed to the employer, expect continued growth in wages which we view as positive for the stock market and America as a whole as well as more of a battle surrounding the areas of the environment, social responsibility and governance (ESG).

• Some of the most well-known names in the industry, specifically Paul Tudor Jones, David Einhorn, and Carl Icahn believe that inflation may be here to stay a bit longer than the Fed has stated they anticipate, in large part due to the large stimulus package as well as the structural issues impacting production, logistics and labor as a result of the pandemic.  We agree to a certain extent and are watching this closely.  However, we will also remind investors that at some point in the not too distant future, the disinflationary impact of technology will again take hold, dampening inflation.

• It is important to keep in mind that there is quite often a disconnect between current economic activity and the stock market as the latter is a mechanism that discounts economic growth up to twelve months in advance.

• The Federal Reserve through the U.S. Treasury Department continues to exercise traditional measures in attempting to navigate an economic rebound by pushing dollars/stimulus into the economy.  Will this work?  We believe so.  However, keep in mind that historically recessions have been brought about by a lack of consumer demand.  This past one was different as it was intentionally created in response to the health crisis.  Perhaps there has been too much unnecessary stimulus trying to create demand that was going to be there anyways as the United States emerged from the pandemic.  For now, just a thought.

• The upcoming week is relatively light in regard to economic releases.  However, on Tuesday we will get a read on November Wholesale Inflation as measured by the Producer Price Index (PPI); on Wednesday, Retail Sales; on Thursday, Initial Claims for Unemployment Benefits as well as Industrial Production and Capacity Utilization.

• The corporate earnings season has wound down.  However, some potentially market moving companies are reporting.  They include – Intercontinental Hotels (IHG), H&R Block (HRB), Lennar Corp (LEN), Fedex (FDX), Sanderson Farms (SAFM) and Darden Restaurants (DRI).

• FOOD FOR THOUGHT

o Investing is about staying within your asset allocation model as the short-term is IMPOSSIBLE to predict whereas the direction of the equity markets over the long haul is VERY PREDICTABLE.  Successful investing requires the ability to harness your inclination to respond by selling during times of market stress.

o Stock prices do not move in a linear fashion.  If they did they would provide returns similar to that of your bank account rather than their historic annualized 8%-10%.  Short-term moves in both directions are unpredictable.  Did you really think that after a 60% move off the bottom in March, there wouldn’t be a correction?

o We love the statement within an article written by Mike Santoli for CNBC who observes that it is “always worth recalling Peter Lynch’s line that more money is forgone by people anticipating corrections than is lost in corrections themselves.”

o From the perspective of the client, it is nearly as uncomfortable and for them even “irrational” to sell or rebalance during a bull market as it is to buy during a bear market.

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