· When you’re on a plane and the pilot warns of upcoming turbulence, most passengers don’t give it a second thought or if they do, it’s only to worry that their beverage might spill. However, when it arrives – well that is another story altogether as your mind immediately races to the darkest depths of past disasters.
Although much less consequential and no how mentally prepared they are, the emotions of investors follow a similar path. Prior to corrections they claims that it is all part of the process, that it’s the occasional price one pays for long-term gains or that the financial markets always recover. However, when it arrives, your mind immediately is transported to how much your portfolio declined during the early days of the COVID Pandemic or to the Great Recession of 2008-2009. You calculate how long it took to break even. You pay more attention to the news, news that will certainly stoke those fears as remember the goal is to gain viewership/listenership regardless of the ramifications. You curse Biden, Trump, the deficit, immigration, Wall Street, et al. You leave no stone unturned. Who needs it? After all, short-term U.S. Treasuries and Certificates of Deposits are paying over five percent (see below) and you can just park your money there. And so on and so on.
As all must, including us, let’s take a deep breath, a sip of coffee/tea and consider how far stocks have come. Over the past year, the S&P 500 has risen 20.62%. The average annual return of the S&P 500 over the past three years, which includes the bear market of 2022, is 6.38% while over the past five years which includes that bear market as well as the 33% drop during COVID, the S&P has posted an annualized return of 11.53%. Not too shabby.
Regardless of past returns as, in addition to where we’ve been, investors should care about where the market is going. We have been on record for several weeks cautioning investors to expect a normal consolidation of recent gains, the catalyst of which will be 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, 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.
· Speaking in Washington, DC this past Wednesday Fed Chair Jerome Powell simply marked his rhetoric to current market interest rates to reflect what the move up in interest rates was already implying noting that “the recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve this confidence. Further along he stated that “right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and evolving outlook guide us.” Without a doubt, investors, many of which expected six rate cuts during 2023, will have to revise their outlook.
· And so the fear-mongering begins, which is why it is so difficult for the average investor to view the market as a weighing machine as opposed to a voting machine a la Warren Buffett. For example, a headline on Bloomberg this weekend read, “Traders Are Cashing Out of Markets En Masse.” Buffett noted that news and emotions can greatly influence the share price of a stock over the short-term but as the fundamentals of a business emerge over time, the market can more accurately determine its value. This is why we believe in long-term rather than short-term investors as quantifying emotions especially during times of duress are difficult, at best.
· According to the Federal Home Loan Mortgage Corporation (FreddieMac), “the 30-year fixed-rate mortgage surpassed 7 percent for the first time this year, jumping from 6.88 percent to 7.10 percent this week. As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later this year. Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.”
· 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 Netflix (NFLX) tumbled despite posting earnings and subscriber growth above estimates as within the quarterly report the company announced that it would no longer provide quarterly membership numbers or average revenue per user starting in 2025. Once the stock settles, we would consider this a buying opportunity. Investors will keep a close eye on shares of Tesla (TSLA), Meta Platforms (META), Microsoft (MSFT) and Alphabet (GOOG) as all announce earnings this coming week.
· Upcoming Economic Reports scheduled to be released this week include the following, on Monday, March New Homes Sales; on Tuesday, M2 Money Supply Data from the Federal Reserve; on Wednesday, March Orders for Durable Goods; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and March Wholesale Inventories; and on Friday, March Personal Income and Spending along with the Final Report from the University of Michigan On Consumer Sentiment.
· Investors will have to deal with a landslide of Q2 earning reports this upcoming week. Companies of note scheduled to report this week, include – Novartis (NVS), Pepsico (PEP), Visa (V), Tesla (TSLA), Meta Platforms (META), Thermo Fisher (TMO), Qualcomm (QCOM), Caterpillar (CAT), T-Mobile (TMUS), Merck (MRK), Microsoft (MSFT), Alphabet (GOOG), ExxonMobil (XOM), Chevron (CVX) and AbbVie (ABBV).
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.”
