· Stocks fell as the yield on the 10-year U.S. Treasury note rose above 5% and the war between Israel and Hamas intensified. As we noted this past week, 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. There is no need to be a hero.

· The Dow Jones Industrial Average joined the Russell 2000 as it also turned negative on a year-to-date basis. Despite a resilient consumer along with the tailwind from adequate corporate earnings, the rise in interest rates is creating short-term alternatives (TARA, There Are Alternatives Elsewhere) to equities which will most likely place a cap on gains.

· The Federal Reserve Reform Act of 1977 enacted on December 15 explicitly outlines the three mandates of the Fed as it pertains to monetary policy which is to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Despite the fact that the act lists three mandates, most refer to the Fed as having only a dual mandate. This dual mandate of maximum employment and stable price strives for an inflation rate of 2% and 4% nominal growth in GDP. However, given the recent spike in interest rates, perhaps the Fed should be concerned about the third mandate, moderate long-term interest rates.

· Yield curve flattens as intermediate- and long-term rates rise relative to short-term rates. The yield on the 10-year U.S. Treasury Note spiked briefly above 5.00%, before closing the week at 4.93%. The rise has been a result of better than expected economic data, the fact that the Fed has slowed its pace of buying and additional supply as a result of the debt and annual budget deficit.

· 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.

· 4.0% is now 4.7%, according to the revision of a study originally in 1994 done by Bill Bengen in 2020. This study is an attempt to determine what percent can you withdraw from your investment portfolio and feel confident that it will last you for your lifetime. We agree with this figure and given the current level of interest rates, might push this to 5% as individuals tend to spend less as they enter the passive stage of retirement, beginning around age 78.

· According to Mortgage News Daily and as reported by CNBC, the average rate on a 30-year mortgage topped 8% for the first time since mid-2000. This, in turn has increased the average monthly payment on a median priced home by more than $1,000 as compared to two-years ago.

· Gold pops as investors continue to seek a safe haven since the start of the war in Gaza. Couple this with the rout in the bond market and economic uncertainty and you have the recipe for short-term support for gold. That said, we believe that the spike will be short-lived and that no secular gains are to be had.

· 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.”

· 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.

· 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%.

· 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 news – Shares of solar energy stock, Solaredge (SEDG) slumped as revenue is expected to come in below expectations and they will continue to lose money; Nvidia (NVDA) comes under pressure as the U.S. Commerce Department announced restrictions on sales of AI chip exports to China.

· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, M2 Money Supply Released by the Federal Reserve; on Wednesday, September New Home Sales; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance along with Third Quarter Gross Domestic Product (GDP); and on Friday, September Personal Income and Spending as well as the Final look at October Consumer Sentiment from the University of Michigan.

· Earnings season is in full swing. Some notable companies reporting Q3 earnings this week include the following – Alphabet (GOOGL), Microsoft (MSFT), Visa (V), General Electric (GE), NextEra Energy (NEE), General Motors (KO), Coca-Cola (KO), Boeing (BA), Meta Platforms (META), IBM (IBM), Honeywell (HON), Royal Caribbean (RCL), Tractor Supply (TSCO), United Parcel Service (UPS), Amazon (AMZN), Hershey (HSY), Intel (INTC), Ford (F), Dexcom (DXCM), Enphase (ENPH), Phillips 66 (PSX), Chevron (CVX), Exxon Mobil (XOM), Abbvie (ABBV) and Chipotle (CMG).

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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