· It’s okay for the market to take a breather as it releases some of the FOMO that has been building up as of late and also allows for those that have missed the rally to dollar cost average in. Additionally, keep in mind that the two worst performing months over the past half century for stocks have been August and September.
· 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.
· 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.”
· Excess pandemic savings nearly depleted. According to a recent report from the San Francisco Federal Reserve, after peaking at $2.1 trillion during August 2021, their analysis “suggested that some $500 billion of the $2.1 trillion in total accumulated excess savings remained in the aggregate economy by March 2023.” The analysis further notes that “a relatively small amount – around $190 billion – remains in the overall economy, and we expect the aggregate stock of excess savings will likely be depleted during the third quarter of 2023.”
· Mortgage Rates back above seven percent. According to data from FreddieMac, the average rate on a 30-year mortgage stood at 7.09% last week, the highest level since November 2022 and right at a 21-year high. That said, as inventories remain at historically low levels, prices should remain elevated. The rate on the same loan one-year ago was 5.13%.
· Online gambling. Despite the fact that the media wants you to stay tuned to the day-to-day activity in the stock market, in this day and age of online gambling, where would you put your money? On a daily basis the stock market goes up about 53% of the days and down 47%. However, as that holding period lengthens so does your chance of success. The odds of the S&P 500 being higher for a holding period of one-year is 73%; for three-years 84%; for five years 88% and for ten years 94%. Finally, for twenty years the chance of success is 100%. It is an historical fact that when it comes to equity investing, it pays to adopt a long-term mindset. (Source, S&P, American Funds)
· We’re in a period of consolidation and that implies some choppiness, perhaps a bit of weakness and the passage of time. During these periods we like to quote legendary investor Warren Buffett who once observed that “the stock market is a device to transfer money from the impatient to the patient.”
· The Baker Hughes US Rig Count declined for the sixth consecutive week, falling by 12 to 642 and in doing so marked its lowest level since February 2022. Viewed as an inverse indicator of energy prices, the decline in rigs along with an eventual replenishment of the Strategic Petroleum Reserve (SPR) should provide a floor near current oil and natural gas prices.
· 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.
· Treasury yields drift higher. The combination of Fed rate hikes, stickier than anticipation inflation, our accumulated national debt and budget deficits will most likely cause interest rates to remain near these levels or perhaps drift higher, especially at the long-end. For savers, this is good thing. However, for those individuals or business that require capital, the cost of borrowing will remain a headwind to economic growth.
· 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 – AI chip giant Nvidia (NVDA) will report earnings this coming week. After blowing the door off earnings last quarter, investors will keep a close eye on this quarter to see if AI continues to have legs.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, July Existing Home Sales and M2 Money Supply Data; on Wednesday, July New Home Sales; on Thursday, July Orders for Durable Goods and the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, Michigan Consumer Sentiment.
· Second quarter earnings season has begun to wind down. However, several notable companies will report earnings that will provide insight into the health of the economy. These include – Lowe’s (LOW), Medtronic (MDT), Baidu (BIDU), AutoDesk (ADSK), Nvidia (NVDA), Analog Devices (ADI), Snowflake (SNOW), Netease (NTES), Workday (WDAY), Intuit (INTU), Dollar Tree (DLTR), Ulta Beauty (ULTA), Dell (DELL) and Marvell Technology (MRVL)
“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.”