· It was a mixed bag this week for equities as the S&P 500, NASDAQ Composite and U.S. Total Market Index rose as the dollar-weighted Dow Jones Industrial Average, mid-cap Russell 2000 and Dow Transport Averages pulled back fractionally. Not bad for a week during which perhaps the two biggest events of the year thus far, namely the Q2 earnings report from Nvidia (NVDA) along with the much ballyhooed Kansas City Fed’s Jackson Hole Symposium took place. (There is more below on both.)
At the present, we’re biding our time through this seasonally weak period, expected to last into mid-October by trimming peripheral positions, tax-loss harvesting and maintaining a healthy balance in money markets yielding approximately 5% along with a combination of fixed-income securities.
· Key Quotes from Fed Chair Jerome Powell at the Kansas City Fed’s Jackson Hole Symposium:
o “It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak – a welcome development – it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
o “The lower monthly readings for core inflation in June and July are welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.”
o “As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk-management considerations are critical. At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”
· Nvidia (NVDA) crushes both revenue and earnings estimates. As the stock reporting earnings after the closing bell on Wednesday, after initially rising Thursday morning, the stock succumbs to profit-taking throughout the balance of the week. For the quarter, NVDA reported earnings of $2.70 per share on $13.51 billion in revenue, far exceeding the estimates of $2.09 per share on $11.22 in revenue. The company also projected Q3 revenue of $16 billion, a number which, if achieved, represents a 170% jump from the year ago period.
· Consumers will most likely turn cautious as October marks the resumption of student loan payments and excess savings accumulated during the pandemic is nearly depleted. Despite the 0.7% rise in retail sales recorded during July, the next few months will be telling as to the strength of the consumer given the persistent concerns regarding inflation.
· Mortgage Rates back above seven percent. According to data from FreddieMac, the average rate on a 30-year mortgage stood at 7.23% last week, the highest level since 2001. That said, as inventories remain at historically low levels, prices should remain elevated. The rate on the same loan one-year ago was just over 5% and on December 31, 2020, 2.67%.
· 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. 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.”
· Shrinkage? Target, Foot Locker, Dick’s Sporting Goods, Walmart, and Dollar Tree are amongst the many companies that attributed “shrinkage” or a higher degree of organized theft that they either hadn’t completely accounted for or was substantially above prior quarters for middling earnings reports.
· 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 seventh consecutive week, falling by 10 to 632 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.
· Remember playing hide ‘n seek as a kid? Well, as we all know eventually that great hiding place gets discovered and becomes quite crowded. Despite the fact that as noted above we have been biding our time by holding a little more cash than we like during these dog days of summer, eventually we will deploy that cash as over the long-term history has shown that this is the recipe for achieving and maintaining financial independence. This past Friday, the Investment Company Institute published data that assets within money market funds have risen by $925 billion thus far this year as investors have hid out from the volatility in the financial markets that occurred in 2022. In our opinion, it will take a while for investors to begin to feel comfortable deploying that cash as the interest paid within these accounts hover around 5%. However, as the Fed gets inflation under control, that rate should begin to decline which in turn will prompt investors to deploy their cash elsewhere.
· 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.
· 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 – UPS (UPS) workers approve new wage, benefit agreement.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, August Consumer Confidence from the Institute of Supply Management and the August Job Openings and Labor Turnover Survey (JOLTS); on Wednesday, the First Revision to Q2 GDP; on Thursday, July Personal Income and Spending and the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, July Construction Spending and the August Non-Farm Payroll Report, to include the Unemployment Rate.
· 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 – BYD Co. (BYDDF), Salesforce (CRM), Veeva Systems (VEEV), CrowdStrike (CRWD), Dollar General (DG), VMware (VMW), Broadcom (AVGO), MongoDB (MDB), Lululemon (LULU) and Hormel Foods (HRL).
“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.”