· Stocks suffered their largest percentage point drop in over a year this past week as a result of heightened tensions in the Middle East, hawkish Fed rhetoric and stronger than expected economic data which in turn might either keep the Fed on the sidelines or limit rate cuts to either one- or two-quarter points at separate meetings rather than the three or more which is what Wall Street was expecting. 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 consistently strong economic data (see below), specifically the movement in the Institute for Supply Management’s Composite Manufacturing Index above 50%, the 303,000 new jobs created during March, an unemployment rate at 3.8% and the increasing Labor Force Participation rate, if the Fed is truly data dependent it 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.
· Under the topic of beating a dead horse, “as we previously noted within several recent weekly postings, ‘the Fed’s efforts to get inflation back to two percent, one-half of its congressionally mandated objectives (the other being maximum employment), from its current level of around three percent, aka the ‘last mile’ may take more time and effort than the move to here from its highs during 2022 as some inflation data will most likely remain sticky. At this time, given the above as well as the approaching U.S. Presidential Election, we believe at the earliest any cut in interest rates would occur following the June meeting. Finally in regard to this matter, the Fed may cut and wait rather than provide a series of cuts.’”
· After rising more than 10% during the first quarter, if history is any guide the S&P 500 may be poised for additional gains during the second quarter and indeed for the balance of 2024. Of the eleven times the S&P 500 posted gains of ten percent or more during the first quarter, it went on to post additional gains for the balance of the year. Although one known hurdle may prove a stumbling block for the S&P 500 to repeat this feat, namely the upcoming Presidential Election, we believe that after a normal pullback, we along with history are on the side of the bulls.
· From the NonFarm Payroll Report, the U.S. labor force is increasing in size as a result of Americans returning to the workforce along with immigration (although we certainly need it much better regulated). As a result, we have the people there to fill some of the jobs necessary for a smoothly functioning economy all the while maintaining a disinflationary trajectory. (PS – if you’d like to throw rotten tomatoes at us for this statement, please provide some data as support.)
· The quality of quarterly earnings kicking off this week along with the forward guidance that will be provided, in addition to data surrounding wholesale and retail inflation also due out, will impact the outlook of the Fed, especially given the strength of the February payroll report released this past Friday.
· Hear ye! Hear ye! To all of our clients, we are in the processing of rebalancing your portfolio, adjusting asset class weightings, to make certain that the risk you are assuming aligns with your objectives. Should you have any questions regarding this matter, feel free to email us, call the office (518-279-1044) or check your Support Documents (Model Portfolio Design) previously provided.
· In our opinion the answer to rising home prices is additional supply as opposed to lower mortgage rates as we believe mortgage interest rates will remain within the current vicinity for the foreseeable future. Unfortunately, this is easier said than done and will take years, not quarters, to solve.
· 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%.”
· The longer this narrow trade in Artificial Intelligence (AI) continues, the more likely retail investors will end with a portfolio of momentum stocks only to lose their gains once the music stops.
· 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.
· After a furious rally off the October 2022 lows, interest rates have been trading within a range indicating to us that, at least for now, perhaps the easy money has already been made in the bond market. Those looking to get in on the long end of the yield curve should wait for more data to see if inflation is indeed cooling to the extent to warrant such an investment.
· Corporate news –In a sign that the consumer might becoming a little more frugal, shares of Ulta Beauty (ULTA), the largest specialized beauty retailer in the United States, tumbled more than 15% this past week after CEO Dave Kimball said at an investor conference “we have seen a slowdown in the total category.” Shares of Tesla (TSLA) fell sharply after rumors circulated that the company was parking its plans for a low-price entry level car. CEO denied these rumors.
· Upcoming Economic Reports scheduled to be released this week include the following, on Wednesday, a measure of Retail Inflation as measured by the March Consumer Price Index (CPI); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and a measure of Wholesale Inflation as measured by the March Producer Price Index (PPI) and on Friday, an initial look at March Consumer Sentiment as calculated by data from the University of Michigan.
· The current earnings cycle is about to begin. This quarter will provide much needed data for the Fed in order to determine the direction of monetary policy. Companies of note scheduled to report this week, include – Delta Airlines (DAL), CarMax (KMX), Constellation Brands (STZ), BlackRock (BLK), Citigroup (C), JP Morgan (JPM), State Street (STT) and Wells Fargo (WFC).
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.”
