· All major indices finished the holiday shortened week higher (financial markets were closed on Thanksgiving and closed at 1:00p EST on Friday) as Treasury yields dropped as consensus swung to at least a slowdown in pace of Fed tightening. Unless there is a definitive statement from Fed Chair Jerome Powell regarding the direction of monetary policy which is highly unlikely, the stock and bond markets are most likely stuck in a trading range through the balance of 2022 with perhaps a slight seasonal bias to the upside.

· Oil prices continue to slide on worry that demand destruction from a slowing global economy will outweigh supply constraints. Perhaps confirming the secular nature of the longer-term move up in oil, shares of the Energy Select SPDR ETF (XLE) which is comprised of the largest energy companies (ExxonMobil, Chevron, SLB, EOG Resources, ConocoPhillips) has risen 5.67% over the past six months while the price of crude has fallen 28.84% from $107.20/bbl WTI to $76.28/bbl.

· The yield curve continued to shows signs of a pending slowdown in the economy as the inverted spread between the two-year U.S. Treasury Note as compared to the ten-year as well as the three-month in relation to the thirty-year set current economic cycle highs.

· Fed Minutes from the November 1-2 meeting of the Open Market Committee (FOMC) indicated that there a potentially a slowing in the pace of rate increases. The minutes noted that “a substantial majority of participants agreed that a slowing in the pace of increase would likely soon be appropriate. The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important.”

· In our opinion, inflation will fall relatively quickly to the 4%-5% range. However, the next 2%-3% will take a long time, measured in years rather than quarters or months. The result should be meaningful yields on bonds and eventually include, Certificates of Deposits as well as money market accounts. With this in mind and if history is any guide, we consider the period 2010-2020 as more of an aberration rather than the norm with respect to the yields on 10-year US Treasury Notes.

· In Barron’s this past week, Al Root writes that “whether cryptocurrencies and brokerages are a good investment for the long run remains a heated debate. ARK Invest’s Cathy Wood says that Bitcoin will be worth $1 million apiece by 2030. Berkshire Hathaway Vice Chairman Charlie Munger calls crypto a combination of fraud an delusion.” Root concludes that “the truth may well lie somewhere in between.” We agree with Root.

· Disney’s parting of ways with CEO Bob Chapek over disappointing fundamental results at the entertainment giant in favor of the legendary previous CEO Bob Iger certainly should help put a floor under the stock price which has dropped from a calendar year 2021 close of $156 to under $100. We agree. It should at least buy the company time.

· To those that are fortunate enough to have a Cash Balance Pension Plan and are nearing retirement, one must take into consideration the fact that, given the recent rise interest rates the lump-sum figure will decline substantially the next time it is recalculated. We would anticipate this number dropping 15% to 25%. However, the monthly income will not be affected.

· As we enter the final month of 2022, please note that for clients with non-qualified accounts, when beneficial, Fagan Associates will begin tax loss harvesting through a process of realizing unrealized losses, to include sales into cash, sales and then waiting thirty days to avoid the wash-sale rule or swaps to similar but not exact securities (for example, FedEx to UPS). Given the rise in interest rates during 2022, when appropriate we will also take a similar course of action with fixed income.

· The coming week is chock full of economic releases, culminating with the report on November Non-Farm Payroll data Friday. Of note, on Tuesday, November Consumer Confidence; on Wednesday, the Second Estimate of Q3-GDP, October Wholesale Inventories, October Job Opening and Labor Turnover Survey (JOLTS); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, October Personal Income, October Construction Spending; and on Friday, November Non-Farm Payroll Report and the November Unemployment Rate..

· The earnings season has begun to wind down. That said, of note are reports from Pinduoduo (PDD), Workday (WDAY), Crowdstrike Holdings (CRWD), Hewlett Packard (HPE), Intuit (INTU), Salesforce (CRM), Snowflake (SNOW), Toronto Dominion Bank (TD), Bank of Montreal (BMO), Dollar General (DG), Ulta Beauty (ULTA), Zscaler (ZS), Veeva Systems (VEEV), Marvell Technology (MRVL), and Kroger (KR).


o We are excited about the recent rise in the yield on fixed-income securities, especially U.S. Treasuries. With yields above three and one-half percent all along the curve, should the Fed succeed in reigning in inflation without inflicting too much long-term damage on the economy, real returns on treasuries will turn positive. This will provide conservative investors with a viable alternative to equities and allow them to reduce portfolio risk.

o We liken the aggressive policy of the Fed to rain. The ground (economy) can absorb a couple inches of rain over an extended period of time. However, it cannot absorb it over an hour or two. We believe that after this upcoming hike it would behoove the Fed to pay more than just lip service to their claim of data dependency or once again, run the risk of cooling off economic growth more than what is needed to quell inflation.

o Unlike the past couple of bear market where investors witnessed a V-shaped bottom, this should be more of a “U,” or a process rather than an event. Not to worry, as we believe this bottom will usher in a new, longer-lasting, more durable bull market, one in which the Fed will not be the center of attraction. However, prior to that, we will need to see inflation ebb and the Fed pivot.

o The yield curve has continued to invert meaningfully. The curve, historically a predictor of an economic slowdown, measures the relationship between like bonds of different maturities. In fact, an inverted yield curve has predicted every recession since 1955. That said, it has also predicted recessions when one did not occur. This past week, the yields on the two- and five-year Treasury Notes were inverted or higher when compared to the ten-year U.S. Treasury Note at 4.42% and 3.85% versus 3.68%. Many market pundits will point to this as evidence of a looming recession. At this time, a technical recession brought about by the Fed raising interest rates is likely, the depths of which are most likely shallow as it will not have been caused by a collapse in the credit markets a la 2007—early 2009.

o Keep in mind that the stock and bond markets are anticipatory in nature, historically moving six to nine months ahead of the confirming data. It is precisely for this reason that investors hoping to “buy when things look better” never get the chance to do so. Unfortunately, by the time the economic data turns for the better, stock prices have already taken this into account. For example, during the pandemic, the stock market bottomed on March 23, 2020, just as the economy was shutting down. Three months later stocks had risen forty percent!

o A component to traditional, longer-lasting bear markets is the emotional strain it places upon the investor. Just as bull markets place pressure on investors sitting on the sidelines, bear markets exert the same force on those that have money in the market. Should the market remain choppy as we believe it will at least throughout the autumn, you can count on a steady drumbeat from talking heads questioning the validity of long-term investing. We have regularly noted that unlike recent pullbacks, the recovery from this one will most likely be more of a process rather than an event and recommend that our clients ignore the short-term and focus on your long-term objectives.

o The Fed has become too important in regulating the economy. Hopefully, when this is over, we can get to a more normalized economy with less overt Fed intervention. Recessions are necessary as they bring back into balance supply and demand. In addition, vis a vis creative destruction, recessions revitalize the economy, positioning it for a new era of growth.

o We continue to monitor the returns of the Vanguard Balanced Index Fund (VBAIX) to illustrate the extent of the selloff even in balanced accounts, including the bond market. VBAIX, somewhat of a proxy for balanced investors has fallen 15.48% through the close of business Friday, as in addition to the pullback in stocks, bonds, which comprise nearly 40% of the portfolio, have been under pressure. For example, the Vanguard Total Bond Market Index Fund (VBMFX) has fallen 12.92%. In fact, even the Vanguard 2020 (VTWNX), a mutual fund designed for “investors planning to retire or leave the workforce in or within a few years of 2020 (the target year)” has dropped 12.64% year-to-date.

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