· Stocks continued to rally off the October 27th closing low. Up until now, the second consecutive year during which the major averages have bottomed during October, a move that has taken the NASDAQ Composite, U.S. Total Market Index, S&P 500 and Russell 2000 at least ten percent higher. Meanwhile, the Dow has been a relative laggard, having risen “just” 9.17%. The move higher in equities has most likely been fueled by seasonality as well as the corresponding move lower on the yield on U.S. Treasury obligations. For example, the yield on the ten-year has declined by 7.64% from 4.84% to 4.47% on the belief that perhaps the Fed is done raising rates.
As we close out the final few weeks of 2024, keep in mind that it is a fool’s game to fight the trend, especially toward the end of the year, as many investors, both professional and retail, who may have lagged throughout the year, try to play catch-up with the indices. Nonetheless, given the strength of the recent rally in stocks and bonds, both could be subject to some profit taking. Moreover, the direction of the financial markets from here will have less to do with technical patterns and more to do with the strength of the economy along with the additional supply of bonds coming to the market.
Once again, we note that 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%.
· 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..
· Gold is on the rise as the dollar has weakened in response to falling domestic interest rates. Presently, gold remains above $2,000/oz. at $2,023.50. This is something to keep an eye on.
· Several cloud companies are set to report earnings this coming week. These include, Zscaler (ZS), OKTA (OKTA), Snowflake (SNOW), Splunk (SPLK) and Salesforce (CRM). In general, the results from these companies should provide insight into the willingness of investors to embrace risk and the staying power of the AI trade.
· Regarding inflation, “the one thing I don’t think we’re going to get away from is the increase in labor costs.” Stew Leonard, Jr., President and CEO of Stew Leonard’s, a supermarket chain based in Connecticut with approximately $341 million in annual revenue.
· 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 11.59% 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 blocks.” 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.
· 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 – Sam Altman was let go by OpenAI, hired by Microsoft (MSFT) and then rehired back by a newly installed board at OpenAI, all during this holiday shortened week. Shares of Dick’s Sporting Goods (DKS) surged as the retailer reported impressive back-to-school earnings and a positive holiday outlook.
· Upcoming Economic Reports scheduled to be released this week include the following, on Monday, Sales of New Homes; on Tuesday, November Consumer Confidence from the Institute of Supply Management and M2 Money Supply; on Wednesday, the Second Preliminary Report on Q3 Gross Domestic Product (GDP); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and October Personal Income and Spending; and, on Friday, October Construction Spending.
· 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 – Zscaler (ZS), CrowdStrike (CRWD), Workday (WDAY), Intuit (INTU), Splunk (SPLK), DollarTree (DLTR), Five Below (FIVE), Foot Locker (FL), Okta (OKTA), Snowflake (SNOW), Big Lots (BIG), Costco (COST), Dell (DELL), Salesforce (CRM), Ulta Beauty (ULTA) and Marvell Technology (MRVL).
“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.”
