• Stocks notched their seventh consecutive week of gains as investors have more than penciled in a soft economic landing.  Let’s even call it “sharpied in.”  Given the rally in stocks and bonds this week, this quarter and this year, we believe that both could use a breather and we are hoping that breather will be one retrospectively measured in time rather than value.
  • Below are some pertinent statements from Fed Chair Jerome Powell following the conclusion of the two-day meeting of the Fed’s Open Market Committee (FOMC) this past Wednesday:
  • “This inflation was not the classic demand overload, pot-boiling over kind of inflation that we think about.  It was a combination of very strong demand, without question, and unusual supply-side restrictions, both on the goods side but also on the labor side, because we had a participation shock.”
  • In regard to cutting rates in 2024, in response to a recession, Powell noted that “it could just be a sign that the economy is normalizing and doesn’t need the tight policy.”
  • “Inflation has eased from its highs, and this has come without a significant increase in unemployment.  That’s very good news.  But inflation is still too high.  Ongoing progress in bringing it down is not assured and the path forward is uncertain.”
  • After FOMC meetings the Federal Reserve publishes a statement summarizing their brief assessment of the economy.  What follows are the changes within this statement as compared to the one issued after the prior one:
  • “Recent indicators suggest that growth of economic activity expanded at a has slowed from its strong pace in the third quarter.  Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low.  Inflation has eased over the past year but remains elevated.”
  • We wish Fed Chair Jerome Powell could have postponed the perceived waving of the victory flag this past week until January’s regularly scheduled two-day meeting, to conclude on January 31, as he may very well have borrowed from next year’s performance of both stocks and bonds, as both rallied mightily.  However, Powell was penned in to a corner by the so-called “Dot Plot,” a chart detailing where each Fed official sees interest rates going over the next three years.  Presently, that chart is projecting three 0.25% rate cuts in 2024, another four in 2025 and three more in 2026 for a total of ten, which in the end will bring the Fed Funds Rate down from its current level of between 5.25% and 5.50% by three percentage points.
  • Thru Thursday, the Russell 2000, an index of  the second and third thousand largest stocks domiciled in the U.S. (small cap) went from a52-week closing low to a 52-week closing high in just forty-eight days.  This length of this feast-to-famine move marked the shortest ever for that index which dates back over forty years.  Generally speaking, this portends further outperformance over the next six months with limited downside.
  • The S&P 500 has risen 10.05% thus far this quarter, seemingly an impressive amount.  However, upon researching the returns of that index over the past quarter century, we found that there have been seven times or 28% during which the S&P has returned above that of this year.  Interestingly, the average return of the S&P 500 during the following quarter is 3.06%, rising five times out of seven.  Many will recall that one of the two was just last year when it fell 4.95% during Q1-2022 after rising 10.65% during Q4-2021.
  • According to the Federal Home Loan Mortgage Corporation (Freddie Mac), “potential homebuyers received welcome news this week as mortgage rates dropped below seven percent for the first time since August.  Given inflation continues to decelerate and the Federal Reserve Board’s current expectations that they will lower the federal funds target rate next year, there will likely be a gradual thawing of the housing market in the new year.”
  • 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 16.47% thus far in 2023 and looks to provide more consistent performance in the future as interest rates appear to be nearing a peak.
  • 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..
  • Corporate news – Shares of Pfizer (PFE) slumped after the pharmaceutical giant cut both revenue and earnings guidance for 2024, citing a slowing in demand for its COVID vaccine.  In response to the weakening demand, company officials announced a $500 million cost cutting plan.  It is often said, companies can’t cut their way to growth.  We agree.  Retail giant Macy’s (M) surged on news that Arkhouse Management and Brigade Capital Management have offered to buy out the company for $5.8 billion.
  • Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, November Housing Starts and Building Permits; on Wednesday, November Sales of Existing Homes; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, November Wholesale Inventories, the Third and Final Estimate of Third Quarter Gross Domestic Product (GDP) and the November Index of Leading Economic Indicators; on Friday, November Order for Durable Goods, November Personal Income and Spending, the November PCE Price Index, November Sales of New Homes and the final December reading of 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 – FedEx (FDX), General Mill (GIS), Micron Technology (MU), Nike (NKE), Paychex (PAYX) and CarMax (KMX).

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.”

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