· Thursday, the S&P 500 closed out their third best month in a decade as November came to a close. Not to be outdone, stocks rose again on Friday to finish their fifth straight week of gains as interest rates continued to fall, corporate earnings came in as good if not better than expected and inflation cooled. After the run-up off the October 2022 as well as 2023 lows, stocks could use a breather and we are hoping that breather will be one retrospectively measured in time rather than value.
This past week was also the second consecutive week in which the cyclical components of the financial markets, namely Real Estate, Materials, Industrials and Financials led the way while the secular components, Technology, Consumer Discretionary and Communication Services lagged.
As we close out the final few weeks of 2024, keep in mind that it is a fool’s game to fight the trend, especially toward the end of the year, as many investors, both professional and retail, who may have lagged throughout the year, try to play catch-up with the indices. Nonetheless, given the strength of the recent rally in stocks and bonds, both could be subject to some profit taking. Moreover, the direction of the financial markets from here will have less to do with technical patterns and more to do with the strength of the economy along with the additional supply of bonds coming to the market.
· Speaking Friday, Fed Chair Jerome Powell stated that “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.” The markets may disagree as the yield on the 10-Year U.S. Treasury Note has fallen from 4.77% upon the conclusion of the most recent meeting of the Federal Reserve’s Open Market Committee, the body that determines the direction of short-term interest rates, to 4.22% Friday.
· Charlie Munger, what we will call one of the two “Oracles of Omaha” passed away this week at the age of 99, just shy of his 100th birthday which he was to celebrate this January 1st. It would take a book to relate what we have learned from Munger and the other Oracle, Warren Buffett. That said, below is a snippet from an article written by ASK’s Group Bharat Shah summarizing one of the two lessons he learned from a 40-minute conversation with Mr. Munger. This pertains to Behavioural Coping. “He emphasized that in investing, one encounters phases of pleasure, pain, and self-doubt. Understanding that these emotions are transient and acknowledging that markets, over time, tend to be more rational due to their innate nature as data analysis machines is crucial. The essence lies in avoiding prejudices and illusions, finding the balance between self-doubt and conviction, and fostering resilience, duly tempered with adequate self-criticism and agility, to intelligently revise one’s own opinion.”
· As noted last week, several cloud companies were set to report earnings this past week. They included Zscaler (ZS), OKTA (OKTA), Snowflake (SNOW), Splunk (SPLK) and Salesforce (CRM). In general, the results from these companies should provide insight into the willingness of investors to embrace risk and the staying power of the AI trade. Overall, they did not disappoint as Salesforce, and Snowflake substantially outpaced the broader indexes, Zscaler was more or less in line while Otka and Splunk lagged.
· After dropping double digits during 2022, the 60/40 Portfolio has righted itself. After dropping 16.90% during 2022, a proxy for this asset allocation, the Vanguard Balanced Index Admiral Shares (VBIAX) has risen 13.25% thus far in 2023 and looks to provide more consistent performance in the future as interest rates appear to be nearing a peak. In fact, according to Bespoke, “November was the second-best month for a 60-40 (S&P 500-Bloomberg Aggregate Bond Index) in more than 30 years.”
· The S&P 500 closed at 4,567.00 on November 30, 2021 and at 4,567.80 on November 30, 2023. Despite the lack of positive movement over the past two years, investors should not be dismayed as it is time in the market rather than the timing of the market that pays off. For example, when you stretch out that time from two years to three, four and five, one would find that the S&P 500 (excluding dividends) returned an average of 8.04%, 9.81% and 10.60% to investors annually.
· As we near the eve of a Presidential Election year, investors may be interested to know that according to Bloomberg, Year 4 (2024) of The Presidential Election Cycle historically is second only to Year 3 (2023) in terms of S&P 500 returns. Years one and two historically lag as perhaps the newly elected President tries to accomplish something unpopular with investors. According to Bloomberg the returns are as follows: year 1, 6.7%; year 2, 3.3%; year 3, 13.5% and year 4, 7.5%.
· The U.S. Economy has become more insensitive to inflation as approximately fifty-eight percent of American homeowners that have a mortgage have one that is under four percent, this according to the Federal Housing Finance Agency (FHFA) and Apollo Global Management.
· Gold is on the rise as the dollar has weakened in response to falling domestic interest rates. Gold rose by $66.20/ounce to $2,089.70 from $2,023.50 one week prior and has risen 14.43% from its year-end 2022 close of $1,826.20.
· Diversification does not necessarily mean risk mitigation. We recommend 15 to 25 stocks within a portfolio over four or five of your favorite sectors along with a couple of speculative issues that comprise a very minor percent. Having too many holdings will be too cumbersome to manage and allow for a regression to the mean.
· Year-End (Q4) Capital Gain Distributions. In a non-qualified account, keep in mind that whether you reinvest dividends and/or capital gain distributions, they are taxable to the registered shareholder. Moreover, given the volatility in the equity markets over the past two years, in many cases, we expect those distributions to be substantial. As we enter the final two months of 2023, Fagan Associates will keep a close eye on these and then attempt to mitigate the damage. It is also important to note, especially given losses in bond portfolios as a result in the rise in interest rates, that mutual funds cannot distribute losses to shareholders. Rather, they must save them to offset potential gains in future years.
· Corporate news – Early Friday, Pfizer (PFE) announced that unacceptably high side effects prompted them to scrap development of their twice-daily experimental weight-loss. The pharma company added that it still planned to release phase two trial data of its’ one-a-day version, danuglipron, during the first half of 2024. Shares slumped 5.12% on Friday. this holiday shortened week. U.S. car manufacturer General Motors (GM) announced that it has initiated a $10 billion (~17% of float), increased their quarterly dividend by $0.03 to $0.12/share and reinstated its full-year 2023 guidance of $1.1 billion.
· Upcoming Economic Reports scheduled to be released this week include the following, on Monday, October Orders for Durable Good and October Factory Orders; on Tuesday, the October Job Openings and Labor Turnover Survey (JOLTS); on Wednesday, October U.S. Trade Balance (Deficit); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and October Consumer Credit; and, on Friday, November Non-Farm Payroll Report, to include the Unemployment Rate and the Preliminary December Report on Consumer Sentiment from the University of Michigan.
· The current earnings cycle has begun to wind down. However, several companies that may change market sentiment are scheduled to report this coming week. These include – AutoZone (AZO), MongoDB (MDB), JM Smucker (SJM), Toll Brothers (TOL), Chewy (CHWY), Veeva Systems (VEEV), RH (RH), Campbell Soup (CPB), Ciena (CIEN), Docusign (DOCU), Dollar General (DG), Broadcom (AVGO) and lululemon athletica (LULU).
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.”
