· Stocks as well as bonds rallied as investors scooped up both on any weakness. In fact on Thursday, the Dow Jones Industrial Average, S&P 500, NASDAQ Composite and the U.S. Total Market Index all closed at record highs. The U.S. dollar did not disappoint, jumping nearly a percent as a result of perceived dovishness from foreign central banks. Investors must keep in mind that just because stock indexes set new highs doesn’t mean they can’t keep doing so. In fact, they are more likely to than not so that it is okay to rebalance, but we would hesitate making any wholesale changes based upon the recent strength in stocks.
Presently, we would welcome a market that bides time by moving sideways or perhaps drifts 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 Federal Reserve concluded its’ regularly scheduled two-day meeting this past Wednesday, deciding to keep its’ benchmark Federal Funds Rate at 5¼ to 5½ %. At the post-meeting press conference Fed Chair Jerome Powell noted that “inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.”
Striking a dovish tone, Powell stated that the members believe that “policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
The Fed’s efforts to get inflation back to two percent, one-half of its congressionally mandated objectives (the other being maximum employment), from its current level of around three percent, aka the “last mile” may take more time and effort than the move to here from its highs during 2022 as some inflation data will most likely remain sticky. At this time, given the above as well as the approaching U.S. Presidential Election, we believe at the earliest any cut in interest rates would occur following the June meeting. Finally in regard to this matter, the Fed may cut and wait rather than provide a series of cuts.
· On Thursday, the Department of Justice leveled a lawsuit against Apple, accusing the $2.65 trillion company as measured by market capitalization of anti-competitive practices. Specifically the DOJ accused the company of Blocking Innovative Super Apps, Suppressing Mobile Cloud Streaming Services, Excluding Cross-Platform Messaging Apps, Diminishing the Functioning of Non-Apple Smartwatches and Limiting the Third Party Digital Wallets. Apple issued the following statement in response:
“At Apple, we innovate every day to make technology people love—designing products that work seamlessly together, protect people’s privacy and security, and create a magical experience for our users. This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets. If successful, it would hinder our ability to create the kind of technology people expect from Apple—where hardware, software, and services intersect. It would also set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology. We believe this lawsuit is wrong on the facts and the law, and we will vigorously defend against it.”
At this time, we would use further weakness in Apple to incrementally add to undersized positions.
· Citing a slowdown in inflation, the Swiss National Bank, the equivalence of the U.S. Federal Reserve, became the first central bank of a major economy to cut interest rates, lowering their main policy rate b 0.25% to 1.50%. Of importance to investors here in the United States was the accompanying statement citing that inflation was back below 2% and was also likely to remain there over the next few years. That said, it is important to remember that Switzerland is an $800 billion economy with a population of approximately 8.7 million as compared to the United States which boasts a GDP of more than twenty-five times that and a population of 330 million.
· The longer this narrow trade in Artificial Intelligence (AI) continues, the more likely retail investors will end with a portfolio of momentum stocks only to lose their gains once the music stops.
· We believe that we are in the early innings of an industrial super cycle, as a result of on-shoring and near-shoring. Investors can benefit by investing in technology, companies that utilize technologies to increase efficiencies, industrials, materials and infrastructure plays.
· There’s a big difference between a top and a consolidation. If it stalls here, we think that the overall market, including technology, will do so as part of a consolidation and not a long-term top. From the performance of the SPDR Select Sector ETFs that looks like exactly what we are getting. We are very content with this.
· According to the Federal Reserve Bank of New York’s Center for Microeconomic Data, “median inflation expectations remained unchanged at 3.0 percent at the one-year horizon, increased to 2.7 percent from 2.4 percent at the three-year ahead horizon, and increased to 2.9 percent from 2.5 percent at the five-year ahead horizon.” The fear of inflation becoming embedded in the minds of consumers and as a result the economy is precisely the reason why the FOMC remains hesitant in regard to cutting interest rates.
· You earned your stripes during 2022, when the S&P fell more than 25% from its prior record high set January 3, 2022 as you retained the appropriate level of risk in accordance with your objectives, which together we designed. Keep in mind that it won’t always be as easy as it is now. According to the Hartford Funds, “from 1984 to 2023, the S&P 500 Index returned an average of 11.33% per year, and investors may have expected similar 11% returns in any individual year. However, there were only three years in which the Index returned between 9% and 12% during this period. Volatility is much easier to tolerate when you expect it.”
· 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 news –In a closely watched initial public offering (IPO), shares of the social media company, Reddit (RDDT), surged 48% to close at $50.44 per shares on Thursday before settling $4.44 lower on Friday to close out the week at $46. the west had expected Boeing to deliver 79 Max planes during 2024. Apple (AAPL) is reportedly in talks with Alphabet (GOOG) in hopes to use its Gemini Artificial Intelligence in its iPhones. In our opinion, that would be win-win for each.
· Upcoming Economic Reports scheduled to be released this week include the following, on Monday, February New Home Sales; on Tuesday, February Orders for Durable Goods, March Consumer Confidence and M2 Money Supply Data from the Federal Reserve; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, the Second Revision to Q4-2023 Gross Domestic Product (GDP) and the final look at March Consumer Sentiment; finally, on Friday Personal Income and Spending.
· The current earnings cycle has peaked and begun to wind down. Nevertheless, several companies of note are reporting this week, to include – Carnival (CCL), Paychex (PAYX) and Walgreen Boots (WBA).
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.”
