· Stocks eked out their sixth straight week of gains as many investors, both professional and retail alike are trying to play catch-up with the S&P 500 (See bullet below entitled “Surprise. Surprise. Surprise.”). We were somewhat surprised that despite Friday’s stronger than expected November Payroll Report and the resulting rise in Treasury yields stocks closed up for the day. Regardless, whether now or perhaps in January, we believe that 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.
· The Open Market Committee of the Federal Reserve (FOMC) will conduct a regularly scheduled two-day meeting beginning Tuesday. Investors should pay attention to the official statement as well as post-meeting comments as historically, a rise in stock prices corresponds with a rise in consumption, not something the Fed wants at this point in the economic cycle as they are trying to negotiate a soft landing. In our opinion, expect the Fed to remain on hold, but issue hawkish commentary in an effort to slow down the appreciation in equities and the resulting “wealth effect.”
· Surprise. Surprise. Surprise (cue Gomer Pyle). According to data from Bloomberg, during 2023, “buying and holding equities has trounced 22 technical strategies used by traders to navigate their ups and downs. The sit-still plan has paid off handsomely after the S&P 500 touched its 2023 low on Jan. 5 only to climb steadily to its highest point on Friday.”
Within the same article, Jamie Cox, Managing Partner at Harris Financial Group noted that “timing the market is one of the most fun things you can try to do because it’s like a dopamine-type thing. If you get it right once, you feel really, really good about yourself and you get it right a couple of times and you feel even more confident. Then you become overconfident, and you miss once, and you destroy all the good that you’ve done.” We couldn’t agree more as at Fagan Associates, we believe that a well-designed investment plan, done in accordance with the objectives of our clients, provides the best opportunity for success over a full economic cycle.
· How long does an economic cycle last? (See bullet immediately above.) Although that is a difficult question to answer, according to Investopedia “the average economic cycle has last roughly five and a half years since 1950, although these cycles can vary in length. As our clients know, we believe in investing with the length of an economic cycle in mind. Given that, the S&P 500 excluding dividends has risen by an average of 9.99% per year (05/31/2018-11/30/2018). Keep in mind that this 5½ year time period includes peak-to valley declines of 19.78% (9/20/2018-12/24/2018), 33.92% (2/19/2020-3/23/2020) and 25.43% (1/3/2022-10/12/2022). Not too shabby.
· According to the Federal Home Loan Mortgage Corporation (Freddie Mac), “the 30-year fixed-rate mortgage averaged near 7 percent this week, down from nearly 7.80 percent just six weeks ago. When rates began to rapidly drop, purchase applications rebounded initially, but this improvement in demand diminished in the last week. Although these lower rates remain a welcome relief, it is clear they will have to further drop to more consistently reinvigorate demand.”
· 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 13.51% 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.
· 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 – Shares of Advanced Micro Devices (AMD) jumped approximately 10% after announcing that both Microsoft and Meta had committed to using their graphics processing chip, Instinct MI300X. Regional carrier, Alaska Air (ALK) announced that it was buying Hawaiian Holdings (HA) another regional carrier for $1.9 billion or $18/share in cash. HA had been trading for ~$6/share prior to the news. ALK plummeted post-announcement.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, Retail Inflation for November as measured by the Consumer Price Index (CPI); on Wednesday, Wholesale Inflation for November as measured by the Producer Price Index (PPI); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, November Retail Sales and October Business Inventories; and, on Friday, November Industrial Production and Capacity Utilization.
· 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 – Oracle (ORCL), Adobe (ADBE), Nordson (NDSN), Costco (COST), Lennar (LEN) and Darden Restaurants (DRI).
“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.”
