· Stocks rallied for the third consecutive week on hopes that the Fed tightening cycle has come to a close. Unlike the majority of the prior rallies, many of the mid and small cap companies have participated. Furthermore, this past week, the Russell 2000, an index comprised of companies outside the large cap dominated S&P 500 was an outperformer on more than a 2:1 ratio. Including 2023, over the past ten years the Russell 2000 has outperformed the S&P 500 only twice. Perhaps 2024 will be different as mid and small caps tend to outperform during periods of declining interest rates.
Regardless of what outperformed, it is important to note that the rally this past week was broad, in that even the sectors that lagged, finished higher. As we close out the final few weeks of 2024 keep in mind that the S&P 500 has rallied nearly ten percent in a little less than a month and could be subject to profit taking and also that this rally has come partially as a response to falling interest rates. How far interest rates fall from here will be subject to the strength of the economy along with the additional supply in bonds coming to the market in order for the U.S. to service its sizable debt.
Despite the sharp move to the upside, we are presently sticking to our belief that “stock prices will be supported by better than expected earnings along with positive seasonality, but held back by valuation along with fears that the war between Israel and Hamas will spread. We are most likely in a trading range with the bias to the upside. Despite the gains thus far this year, we counsel patience. There is no need to be a hero.”
· According to First Trust, it is important to note that “bonds have exhibited positive total returns 100% of the time over the 6 Month, 1 Year, 3 Year and 5 Year time periods following each of the last seven Fed tightening cycles.” The average returns over those time periods were 9%, 15%, 13% and 11%, respectively. Despite the historical data from First Trust suggesting otherwise, we will caution investors that this time those returns could be muted as the last seven tightening cycles most likely started and concluded a multi-generational bull market in bonds.
· 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%.
· An article on the CNBC website quotes Marco Iachini, Senior Vice President of Vanda Research when describing the “virtues of lazy investing – a strategy that’s working well amid higher interest rates.” Iachini states that “income-seeking retail investors are taking advantage of the new high-rate regime – some are calling it ‘T-bill and chill.” As U.S. Treasury Bills or ‘T-bills are defined as those that mature with one-year we would caution investors against this strategy as there is substantial interest rate risk or the potential of having to renew a maturing security at much lower rates. Generally, we recommend laddering bonds in order to add predictability to your stream of future income. Let’s call it “‘T-note and float” as T-notes don’t mature for up to ten years.
· 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 9.06% thus far in 2023 and looks to provide more consistent performance in the future as interest rates appear to be nearing a peak.
· One of our biggest intermediate to long-term worries for U.S. investors was stated within a speech focusing on Europe by the European Central Bank President Christine Lagarde before the European Banking Congress. With the speech Lagarde noted that “there are increasing signs that the global economy is fragmenting into competing blocs.” In our opinion, should this fragmentation continue at its recent pace or even accelerate, it will be accompanied by heightened inflation along with the greater possibility of military conflict as opposed to an environment of economic cooperation.
· 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.
· The normal. Prior to the pandemic, the tenor of the economy was one in which there was growth in GDP of approximately two percent in a sub-two percent inflationary environment. Many economists labeled this period the “new normal” as GDP growth prior to this period, which began after the Great Recession ended in Q1-2009, was typically 4% GDP and 2-plus percent inflation. Post-pandemic, GDP and inflation appears to be regressing back to pre-Great Recession numbers.
· Your money is not a competition but rather a means to allow you the freedom to do the things you want to do. It is security and with this in mind, perhaps it is time to lengthen the duration of your fixed income portfolio.
· May we, as Americans, continue to strive for the ideals of a “government of the people, by the people, for the people,” set forth in the Gettysburg Address, a speech by President Abraham Lincoln, 160 years ago today, on November 19, 1963.
· Autumn is a time to harvest and in regard to the non-qualified accounts managed by Fagan Associates, we will continue looking for ways to offset realized capital gains by realizing some losses in portfolios, if available. With that in mind, feel free to contact us should you have any questions regarding this process which occurs throughout the year, but quite often at an accelerated pace during the final quarter.
· Corporate news – Shares of Gap Stores (GPS) and Ross Stores (ROST) both rallied on better than expected earnings in a sign that at least a selected group of retailers have found their footing relative to Amazon (AMZN); rallied more than 30% on substantially better than expected earnings. Despite the rally, shares of the retailer have fallen precipitously over the past decade; Berkshire Hathaway (BRKB) posted earnings of $10.761 billion, 40% higher than year ago levels.
· Upcoming Economic Reports scheduled to be released this week include the following, on Monday, October Index of Leading Economic Indicators (LEI); on Tuesday, October Sales of Existing Homes; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, October Orders for Durable Goods and November Consumer Sentiment from the University of Michigan.
· The current earnings cycle has begun to wind down. However, several companies that will provide worthy insight into the strength of the economy are schedule to report this coming week. These include – Keysight Technologies (KEYS), Zoom Video (ZM), Agilent Technologies (A), Best Buy (BBY), Nvidia (NVDA), Lowe’s (LOW), Medtronic (MDT), Dell (DELL), Baidu (BIDU) and Deere (DE).
“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.”