• The broad indexes suffered a second consecutive week of selling, the catalysts being a normal consolidation of recent gains along with a justifiable and yet we think temporary concern that getting inflation down to one-half of the Fed’s dual mandate of two percent is going to take more time than initially anticipated.  That, in turn will keep Fed monetary policy on hold for longer than market participants may have anticipated.  Although higher for longer does increase the potential for Fed policy mistakes, in our opinion so would cutting too soon as inflation, once ignited and allowed to burn is quite difficult to extinguish.  Over time and perhaps after a much needed consolidation, we believe the financial markets will come to realize this as well.  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.”
  • Given the nagging data in regard to inflation (see below), specifically the stronger than expected Consumer Price Index within which the cost of shelter (35% of the index) rose 0.4% during March and by 5.7% y/y, if the Fed is truly data dependent and we believe they are, they will remain on the sidelines AT LEAST until June 12, the date that the Open Market Committee concludes its regularly scheduled two-day meeting.  We do not expect the Fed to cut rates at its upcoming meeting, scheduled for April 30 – May 1.  That said, there are still two months of inflation data that remain prior to that meeting for the Fed to digest.
  • The interest rate on U.S. Treasuries jumped in response to the sticky inflation data noted above as the yield on the 10-year closed the week at 4.50%, after peaking at 4.56% Thursday.  When presented with pullbacks in the Treasury market, similar to equities, it historically is a good idea to incrementally add to positions.
  • The U.S. Dollar rose to its highest level in five months as investors around the world snapped up the greenback, attempting to lock in attractive yields along with the safety it provides.  Global tensions as well as nagging inflation should keep the dollar strong into the summer months.
  • Unfortunately, not to be outdone by the U.S. Dollar, oil prices rose on heightened geopolitical risk as well.  We have been consistent in our belief that investors have priced in a cyclical bull market for energy, but not a secular one.  We believe we are in the latter.  However, commodities are historically better purchased on weakness rather than on strength so other than adding to underweighted positions, at this time we would recommend dollar cost averaging into this sector.
  • According to the Federal Home Loan Mortgage Corporation (FreddieMac), “mortgage rates have been drifting higher for most of the year due to sustained inflation and the reevaluation of the Federal Reserve’s monetary policy path.  While newly released inflation data from March continues to show a trend of very little movement, the financial market’s reaction paints a far different economic picture.  Since inflation decelerated from 9% to 3% between June 2022 and June 2023, the annual growth rate of inflation has remained effectively flat, ranging from 3.1% to 3.7% and averaging 3.3%.  the March estimate of 3.5% annual growth is in the middle of that range.  However, the market’s reaction was dramatically different, as illustrated by a significant drop in the Dow Jones Industrial Average, post-announcement.  It’s clear that while the trend in inflation has been close to flat for nearly a year, the narrative is much less clear and resembles the unrealized expectations of a recession from a year ago.”
  • After a significant run-up in their shares prices, investors responded lukewarm to the Q1 earnings posted Friday by banking giant, JP Morgan Chase.  Contained within the release was the following quote from JP Morgan Chase CEO Jamie Dimon:

“Many economic indicators continue to be favorable.  However, looking ahead, we remain alert to a number of significant uncertain forces.  First, the global landscape is unsettling – terrible wars and violence continue to cause suffering, and geopolitical tensions are growing.  Second, there seems to be a large number of persistent inflationary pressures, which may likely continue.  And finally, we have never truly experienced the full effect of quantitative tightening on this scale.  We do not know how these factors will play out.”

  • Many homeowners are “locked in” their current home by their low mortgage rate.  (Even George Jefferson might have had trouble “Movin’ On Up.”)  According to data within an article published on CNBC this past week, “in the 22 years before the Fed started raising rates in 2022, upgrading to a 25% more expensive home would have increased their average homeowner’s monthly principal and interest by about 40%, or about $400 on average, according to data from ICE Mortgage Technology.  Moving to a similar house across the street wouldn’t change their payment at all.”

“In stark contrast today, the average homeowner with a near-record low mortgage rate would see their monthly payment shoot up 132%, or roughly $1,800, in order to move up to a 25% more expensive home.  Buying the same home they’re in now would increase their monthly payment by 60%, according to ICE.”The article goes on to note that “The vast majority of borrowers today, 88.5% have mortgages with rates below 6%, according to Redfin.  Roughly 59% have rates below 4%, and close to 23% of homeowners have rates below 3%.”

  • 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 –Within his annual letter to shareholders, Amazon (AMZN) CEO Andy Jassy noted that operating margins during 2023 amounted to 6.4%, compared to 2.4% during 2022.  In addition to cost cutting measures, Jassy pointed to the benefits of AI.  Something we believe we will hear from many, many companies over the coming quarters.
  • Upcoming Economic Reports scheduled to be released this week include the following, on Monday, March Retail Sales; on March Housing Starts, March Industrial Production and March Capacity Utilization; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, March Sales of Existing Homes and the March Index of Leading Economic Indicators.
  • The current earnings cycle swings into full gear this coming week.  This quarter will provide much needed data for the Fed to determine the direction of monetary policy.  Companies of note scheduled to report this week, include – Goldman Sachs (GS), Charles Schwab (SCHW), Morgan Stanley (MS), LVMH (LVMH), United Health (UNH), Johnson & Johnson (JNJ), Bank of America (BAC), Progressive (PGR), Elevance Health (ELH), Intuitive Surgical (ISRG), Netflix (NFLX), Marsh & McLennan (MMC), L’Oreal (LRLCH), Blackstone (BX), Taiwan Semiconductor (TSM), Procter & Gamble (PG) and American Express (AXP).

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.”

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