- The dog days, or shall we call them the raining cats and dog days of summer, specifically August, has thus far lived up to its reputation as a month during which the equity markets have trouble making any headway. With large-cap tech taking a breather after a monstrous run, it will be difficult for the S&P 500 to make substantial headway, given its composition. Most recently, Information Technology, Consumer Discretionary and Communication Services comprised approximately 47% of this market capitalization weighted index. The three largest holdings within each are Apple, Amazon and Meta Platforms, all of which have recently come up against some profit taking.
- Despite and due to the mind numbing weekly gyrations within the financial markets, it is prudent to take a long-term perspective when investing. Despite the weekly noise, it is also prudent to not succumb to the tendency to abandon this way of thinking. With this in mind, we again note that “as analysts have raised their price targets for the S&P 500 and Investor Sentiment as registered by the American Association of Individual Investors has improved to their highest level in two years, it is not surprising that stocks took a breather this past week as historically, markets climb a wall of worry. It’s time for a breather. Let’s hope we get one as the angst created by a modest pullback will provide the bricks needed to rebuild that wall.”
- At this time we believe the Fed will not raise rates at its next regularly scheduled meeting September 19-20. We also believe that rates will stay in and around these levels (historically normal) for longer than was originally expected. As noted last week, the Fed has already used its mulligan on inflation when Chair Jerome Powell called it ‘transitory’ back in 2021 and therefore does not want to run the risk of being wrong again. This may in turn keep them more hawkish than the market is currently anticipating. That said, given the ten rate hikes since the first on March 17, 2022, totaling 5.50%, we believe we are at the point in the economic cycle where the Fed will be moving more cautiously, perhaps not at every meeting of the Open Market Committee (FOMC) and in increments of 0.25% as opposed to aggressively. The market can handle this.”
To the above we will add that Fed action from this point forward in the economic cycle is more about messaging and signaling their hawkish intentions as opposed to providing a headwind or tailwind to short-term economic activity.
- Prices at the wholesale level as measured by the Producer Price Index (PPI) rose 0.3%, above the consensus estimate of 0.2%, perhaps indicating that the drop in inflation has bottomed. This may result in higher interest rates for longer.
- Shelter costs remain elevated. As measured by the Consumer Price Index (see below), accounting for 90% of the rise in the CPI during July, costs for shelter rose 0.4%, matching the increase recorded during June and by 7.7% y/y. Should these costs remain sticky, it will be difficult for the Fed to get inflation down to its target, 2%. The two main components that comprise shelter as defined in the CPI are “owners’ equivalent rent of residences (OER) and rent of primary residences (rent).” Shelter comprises approximately 35% of the CPI.
- Investors expect the environment to be, like a stop light, green or red. Currently, we believe that the light is flashing “yellow,” meaning that it is okay to cross the street, just look both ways. As noted within prior Snapshots, “the markets are pricing in a soft landing, but most likely have not priced in either a hard one or for that matter a reacceleration of economic activity. That said, in our opinion a soft landing will also include turbulence on the descent in the form of decelerating corporate earnings, a weakening labor market and credit issues. The bottom line, let’s not confuse a soft landing with smooth sailing. At this point, we believe the financial markets are fairly valued.”
- The Chinese economy is struggling as it deals with poor worker demographics and a deflationary environment. Too much public debt, a shift away from China as the main supplier to the world developed economies, an aging population, overbuilding and missteps during and after COVID have led to their current economic malaise. As China is the largest consumer of commodities in the world, this may have global implications.
- Despite the recent choppiness in the S&P 500, the rally off the October 12, 2022 closing low appears to be taking a breather rather than falling apart as the leaders and most heavily weighted sectors, Technology, Communication Services and Consumer Discretionary have hit valuation headwinds lately. However, rather than selling and going to the sidelines, investors have rotated into other sectors. Evidence of this can be seen in the year-to-date performance of the Select Sector SPDR ETFs this week as compared to those prior.
- According to Bloomberg, “the combined total amount of Treasury bills, notes and bonds outstanding increased by about 1% during July to a record $25.137 trillion, according to data released Friday. It’s poised to continue to mount. As recently as June 2020, total marketable debt outstanding was under $20 trillion. It was $15 trillion as recently as June 2018. Borrowing increased sharply in 2018 to finance tax cuts and surged in 2020 to finance the federal pandemic response. Now it’s expanding in part because higher interest rates have inflated the cost of servicing the existing debt.” All things being equal, additional supply coming to market amidst constant demand will cause a drift higher in interest rates.
- Don’t get sucked in by investing solely in short-term fixed income securities such as money markets, short-term bonds or Certificates of Deposit (CDs) despite their yields being higher than longer dated securities as a result of the inverted yield curve. With the interest on the 10-year U.S. Treasury hovering around 4%, we recommend laddering bonds in order to add predictability to your stream of future income.
- Corporate news – Berkshire Hathaway (BRKB) reported better than expected earnings of $10.04 billion, up 6.6% from year ago levels, this as its cash hoard rose to $150 billion. Disney (DIS) rose on earnings that outpaced estimates along with an announced $2 billion deal with Penn Entertainment (PENN).
- Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, July Retail Sales and July Business Inventories; on Wednesday, July Housing Starts along with July Industrial Production and Capacity Utilization; on Thursday, July Index of Leading Economic Indicators (LEI) and the Weekly Report of Initial Claims for Unemployment Insurance.
- Second quarter earnings season has begun to wind down. However, several notable retailers will report earnings that will provide insight into the health of the consumer. Overall, companies reporting of note, include – Home Depot (HD), Suncor Energy (SU), Agilent Technologies (A), Cardinal Health (CAH), Target (TGT), Cisco Systems (CSCO), TJX (TJX), Walmart (WMT), Ross Stores (ROST), Applied Materials (AMAT), Deere (DE), Estee Lauder (EL) and Palo Alto (PANW).
“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.”
