• Stocks held their own this past week as earnings season has begun despite volatility in the bond market along with the terrorist attack upon Israel.  Treasury yields moved lower as many global investors view the dollar as a safe haven investment which may cause the Fed to not raise interest rates at their upcoming meeting (Oct 1–Nov 2).  In our opinion, at this point stock prices will be supported by better than expected earnings along with positive seasonality, but held back by the fears that the war between Israel and Hamas will spread along with valuation.  We are most likely in a trading range with the bias to the upside.  Despite the gains thus far this year, we counsel patience.
  • This past Thursday, October 12, marked the one-year anniversary in the bottom of the recent bear market.  As noted below, the past year has been led by large-cap tech stocks as the NASDAQ Composite has risen 30.31%.  This has also helped the S&P 500 jump 21.60%.  However, mid-cap stocks have not fared very well as the Russell 2000 has appreciated only 2.75% and the INVESCO S&P500 Equal Weight ETF (RSP) has risen 11.92%.
  • Both Social Security and Supplemental Security Income (SSI) benefits are set to increase by 3.2% in 2024 as part of a cost-of-living adjustment (COLA).  The increase in benefits is in conjunction with the increase in the Department of Labor’s Consumer Price Index.
  • China’s economy continues to struggle as exports and imports both fell by 6.2% during September and have also fallen y/y.  Not surprisingly, Russia is the only significant country to whom both exports and imports have risen year-to-date.
  • The Fed may or may not be done raising rates.  But is the market?  Although monetary policy greatly impacts short-term interest rates, as maturities lengthen the Fed’s influence decreases while the influence of market participants increases.  Evidence of this can be seen in the volatility treasury investors experienced this past Thursday when the yield on the 30-year Treasury Bond rose as much as 19 basis points to 4.97% in response to a lackluster auction before rebounding Friday to close at 4.78%.
  • The Federal Reserve has shrunk its balance sheet from $8.965 trillion to $7.952 trillion since April 13, 2022 by not reissuing securities to replace those that mature and also by selling fewer securities to the marketplace.  After starting slowly the Fed has reduced the sale of treasuries and mortgage-backed securities (MBS) to the tune of approximately $60 billion and $35 billion monthly thereby reducing the amount of money in the economy and therefore economic growth.  Despite this effort, the balance sheet of the Fed still remains $3.78 trillion above the pre-pandemic level around $4.18 trillion.
  • According to the Federal Home Loan Mortgage Corp (Freddie Mac), “for the fifth consecutive week, mortgage rates rose as ongoing market and geopolitical uncertainty continues to increase.  The good news is that the economy and incomes continue to grow at a solid pace, but the housing market remains fraught with significant affordability constraints.  As a result, purchase demand remains at a three-decade low.”
  • Time will tell if investors/consumers will be inclined to slow down purchases as interest rates have moved higher just as they may have been inclined to increase purchases in the previous low interest rate environment.  For example, stocks did well during the late 1990s even though the 10-year U.S. Treasury Note was well above 5% perhaps because interest rates prior to this period were much higher so they deemed this rate “low.”  Today’s environment is quite the opposite as interest rates over the past decade were much lower.  Perhaps investors deem this interest rate “high.”
  • According to oil services company Baker Hughes, oil and natural gas rig counts rose by 3 to 622.  Despite the flight increase thus far this year, the number of rigs has fallen by 157 from 779 and by 143 from 765 over the past year.  Despite the potential for a technical pullback in oil, the drop in rigs is a secular tailwind to prices.
  • Should the federal government shut down as a result of the impasse over the debt ceiling, it will mark the 22nd time that it has done so since 1976.  According to data mined by the Carson Group within an article that appeared in Kiplinger’s, “during the 21 government shutdowns, the S&P 500 rose 55% of the time, generating an average return of 0.3%.  Even better, 12 months after the end of the shutdown, the S&P 500 was higher 86% of the time, with an average return of 12.7%.”  The article also makes particular note of the 35-day shutdown of 2018-2019, a period during which the S&P 500 rose 10.3%.
  • According to data from Apollo Chief Economist Torsten Slok, “the seven biggest stocks in the S&P 500 are up more than 50% in 2023.  The remaining 493 are basically flat.” Those seven in order of market capitalization include Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla and Berkshire Hathaway.  Further evidence of this bifurcated market can be seen in the year-to-date performance of the Russell 2000, the second and third thousand largest American stocks, which has risen less than one percent while the S&P 500 is up 12.72%.
  • 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.
  • Don’t get sucked in by investing solely in short-term fixed income securities such as money markets, short-term bonds or Certificates of Deposit (CDs) despite their yields being higher than longer dated securities as a result of the inverted yield curve.  With the interest on the 10-year U.S. Treasury climbing well over 4%, we recommend laddering bonds in order to add predictability to your stream of future income.
  • Corporate newsMicrosot (MSFT) closed on its acquisition of Activision Blizzard (AVTI) after gaining approval from the U.K.’s Competition and Markets Authority; JP Morgan (JPM), Wells Fargo (WFC) and Citigroup (C) all post earnings and revenue that came in above estimates.
  • Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, September Retail Sales, September Industrial Production & Capacity Utilization and August Business Inventories; on Wednesday, September Housing Starts; and on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, September Existing Home Sales and the September Index of Leading Economic Indicators (LEI).
  • This coming earnings season will go a long way in determining how the financial markets close out 2023.  Some notable companies reporting Q3 earnings this week include the following – Johnson & Johnson(JNJ), Bank of America (BAC), Lockheed Martin (LMT), Goldman Sachs (GS), Elevance Health (ELV), Morgan Stanley (MS), Abbott Labs (ABT), Neflix (NFLX), Procter & Gamble (PG), Tesla (TSLA), L’Oreal (LRLCY), AT&T (T) and American Express (AXP).

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.”

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