·         The fed hiked interest rates by 0.75% for the fourth consecutive time this past Wednesday which comes on the heels of two prior 0.50% and 0.25% at the prior two meetings which brings the Federal Funds Rate to 4.00%, its highest level since 2008.  Within the policy statement was some cause for hope that the Fed’s torrid hiking pace would ease somewhat as it noted that the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”  A brief rally ensued until Fed Chair Powell threw cold water on that notion during his press conference.  Referring to rate hikes, Powell noted that “we still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

The stock as well as bond market continued selling off through Thursday before rallying Friday.  Despite this setback, with sentiment so negative and with the mid-term elections looming, any good news should help at least support the market at these levels if not push it higher.  In our opinion, Republicans taking a narrow majority either the House or Senate would most likely be viewed favorably by the financial markets.

·         The October Non-Farm Payroll report was released this past Friday and by most accounts, the labor market remains strong.  In addition, the Job Openings and Labor Turnover Summary (JOLTS) released this past Tuesday reported that there were still 10.717 million jobs available, but only 6.082 million Americans looking for jobs.  This gap should narrow considerably as savings rates continue to decline.  Along with an easing of inflation as measured by the Consumer and Producer Price Indexes, there must be some cooling in the labor market for the Fed to relax its tightening pace.  We thought, as did many, that these events would occur sooner than this.

·         For those that are considering selling at this point, according to data analytics firm YCharts, over the past seventy years, the S&P 500 has always been higher three years after it has fallen 25% from all-time highs.  What many investors do not realize is that stocks bottom well ahead of the economy.

·         According to Freddie Mac, the interest rate charged on the 30-year mortgage dipped back below 7%, closing at 6.95%.  Last week, for the first time since April 2002, mortgage rates closed above 7%,, closing at 7.08%.

·         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.

·         The yield on the 10-Year U.S. Treasury Note rose along with the Fed Rate Hike, closing at 4.17% this past Friday as compared to 4.02% one week ago and 1.52% at the close of calendar year 2021.  That means for every $100,000 invested a holder of this note will receive additional interest of $2,650 per year and $26,500 over the life of the note when compared to one purchased at the close of last year.  (FYI, U.S. Treasury Obligations are sold as bills which are purchased at a discount and mature at face value in one year or less; notes which are purchased at a discount or premium, pay interest and mature between one and ten years and bonds, which are exactly the same as notes, but mature in ten to thirty years.)

·         For those receiving Social Security, benefits, as a result of the rise in inflation over the past year as measured by the Consumer Price Index (CPI), expect an 8.7% increase in benefits beginning in January 2023.  Please note that this cost of living adjustment will also apply for those under the Civil Service Retirement System (CSRS) as well as those under the Federal Employees Retirement System (FERS).  Should the Fed be able to bring inflation under control, real, inflation adjusted income gains will occur.

·         Welcome to the fourth quarter.  Please note that for clients with non-qualified accounts, when beneficial, Fagan Associates will begin tax loss harvesting through realizing unrealized losses to include sales into cash, sales and 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, when appropriate we will also take a similar course of action with fixed income.

·         This week will be light in regard to economic data as the market digests last week’s rate hike along with last Friday’s October Non-Farm Payroll Report.  That said, the highlight of the week will occur on Thursday with the release of October Retail Inflation as measured by the Consumer Price Index (CPI).  Other notable data points include – on Monday, September Consumer Credit; on Wednesday, September Wholesale Inventories; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, November Michigan Consumer Sentiment.

·         The earnings season rolls on.  As with the week prior we will pay particular attention to the forward guidance, the impact of the strengthening dollar and the reaction of investors.  Of note are reports from DuPont (DD), Activision Blizzard (ATVI), Occidental Petroleum (OXY), Walt Disney Company (DIS), Berkshire Hathaway (BRKA, BRKB), Honda Motor (HMC) and National Grid (NGG).


o    We are excited about the recent rise in the yield on fixed-income securities, especially U.S. Treasuries.  With yields above three 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 4.66% and 4.33% versus 4.17%.  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 18.84% 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 16.15%.  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 16.33% year-to-date.

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