· The Dow Jones Industrial Average, S&P 500, and Total Market Index all closed at record highs this past week, one during which earnings from GPU chip giant Nvidia (NVDA) provided the catalyst. Ironically, the NASDAQ Composite, the exchange where Nvidia trades, underperformed the other three and remains fractionally off a record high, which if surpassed, will be its first since late 2021. We believe that even though that catalyst may be short-lived as the market is trading at historically rich valuations, they will provide support to the downside as their earnings as well as others along with the aura of the potential of Artificial Intelligence (AI) will keep investors interested. That said, should the market move substantially higher, the Fed may find itself even more reluctant to reduce interest rates (see below). As noted previously, we believe the stock market can handle “higher rates for longer” as long as corporate earnings remain sufficient enough to justify current valuations at or near these levels, which we think likely.

Presently, we would welcome a market that bides time by moving sideways or perhaps drifting somewhat lower as it would work off the excesses created as a result of the more than 20% move from the October 27, 2023 bottom, allowing bullish sentiment to cool a bit.

· The Minutes of the Federal Open Market Committee Meeting on January 30-31, 2024 were released this past week. They expressed some satisfaction over what their policies have accomplished in relation to driving down inflation, but some reluctance when it comes to cutting interest rates. Below are a couple of statements that appeared within the document that illustrated those items.

  • “While the inflation data had indicated significant disinflation in the second half of last year, participants observed that they would carefully be assessing incoming data in judging whether inflation was moving down to 2 percent.”
  • “Total and core PCE Price Inflation were both projected to step down in 2024 as demand and supply in product and labor markets moved into better alignment. By 2024, total and core PCE price inflation were expected to be close to 2 percent.”
  • “As an upside risk to both inflation and economic activity, participants noted that momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year.”

· Given the pace of economic activity along with the strength of the stock market, there is a good chance that when the Fed cuts interest rates they will not do so in a linear fashion, but more in a cut and then wait-and-see pattern. Despite the fact that many believe the Fed will cut over several consecutive meetings, we do not consider it a fait accompli nor do we consider it a prerequisite for continued market strength.

· Mortgage Rates Approach 7.00% -- Again. According to the Federal Home Loan Mortgage Corporation (FreddieMac), the interest rate charged on a 30-year mortgage rose to 6.90% this past week, up from 6.24% just two weeks ago. In a statement, FreddieMac noted that “strong incoming and economic inflation data has caused the market to re-evaluate the path of monetary policy, leading to higher mortgage rates. Historically, the combination of a vibrant economy and modestly higher rates did not meaningfully impact the housing market. The current cycle is different than the historical norms, as housing affordability is so low that good economic news equates to bad news for homebuyers, who are sensitive to even minor shifts in affordability.”

· Excluding Energy, market leadership stayed relatively stable week/week led by Materials, Financials and Health Care, as reflected by the Select Sector SPDR ETFs detailed below. This is somewhat surprising given the Nvidia earnings. Furthermore, mid-caps, as represented by the Russell 2000 did not participate as the index fell while other the other major indexes rose. We noted last week that we did not believe that there would be sustainable momentum into mid- or small-caps as we believe that investors will continue to favor large-cap, more liquid securities.

· Graphic Processing Unit (GPU) giant Nvidia (NVDA) reported blowout earnings this past Wednesday. The maker of computer chips necessary for AI machine learning, PC graphics, video games and cryptocurrency mining posted earnings of $5.16 per share vs the $4.64 that was expected on revenue of $22.1 billion, surpassing those estimates by ~$1.5 billion. Over the past year, Nivida’s revenue has risen by 265% on a 409% increase in Data Center Revenue and improving margins. During the earnings call CEO Jensen Huang noted that “fundamentally, the conditions are excellent for continued growth.”

· There won’t be a bell rung at the top just as one was not sounded at the bottom which is the reason that trimming winners is prudent portfolio management. We realize that it isn’t easy and that clients tend to look more at the shares of securities sold rather than the ones that remain in their portfolios. Certainly our goal is to keep pace with the appropriate indexes. However, our overriding concern is to help clients achieve and retain financial independence in the most efficient way, all the while shouldering a level of risk that conforms to their mutually- agreed upon needs and tolerance to risk.

· GlobalFoundries, the world’s third-largest contract chipmaker, will build a new semiconductor production facility in Malta as a result of being awarded $1.5 billion from the U.S. Government, in an effort to bolster domestic production. The new facility should employ up to an additional 12,000 people.

· Japan’s Nikkei 225 made an new all-time high this past Thursday. One might wonder why this appears in our Snapshot. The reason – it is the first in nearly 35 years. The last time the Nikkei 225 made an all-time high prior to Thursday’s was on December 29, 1989.

· After a furious rally off the October 2022 lows, interest rates have been trading within a range indicating to us that, at least for now, perhaps the easy money has already been made in the bond market. Those looking to get in on the long end of the yield curve should wait for more data to see if inflation is indeed cooling to the extent to warrant such an investment.

· Corporate newsAmazon (AMZN) is set to replace Walgreens (WBA) as a member of the dollar-weighted Dow Jones Industrial Average at the start of trading tomorrow which had been a component for only five years but has seen its share price erode by some two-thirds over that period of time. Capital One (COF) has agreed to purchase Discover Financial Services (DFS) for $35 billion. If approved, the deal would make Capital One the largest such company by loans and the third largest by purchase dollars. It also provides Capital One with access to Discover’s payments networks, viewed by many as the real value to the deal.

· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, January Orders for Durable Goods and February Consumer Confidence; on Wednesday, January Wholesale Inventories; on Thursday, Weekly Report of Initial Claims for Unemployment Insurance and January Personal Income and Spending; and on Friday, January Construction Spending along with the Final February Reading on Consumer Sentiment from the University of Michigan.

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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