Last year’s market leaders, Technology, Communication Services and Consumer Discretionary lagged for the third consecutive week as investors continued to rotate into Energy, Consumer Staples and Health Care, choosing to redeploy some of their gains in the former and redeploy them into the latter. As we have routinely noted within this column, October can be a volatile month and there is no reason to believe this October was going to be any different. Although we like Energy and Health Care for the long-term, we think the selling pressure on Technology and related stocks will soon abate, providing opportunity for investors. Stay alert for these opportunities.
A quick note on fixed income, we have been working diligently on rebalancing by realigning portfolios in accordance with their long-term objectives. Often this has resulted in extending maturities.
- Within its latest Global Financial Stability Report, the International Monetary Fund (IMF) warned that the level of global sovereign debt coupled with a nearly insatiable demand for debt from the buildout associated with Artificial Intelligence (AI) could put pressure on bond prices, resulting in higher yields. The report stated that “a sharp rise in yields would mark down asset values through higher discount rates, including for AI-related assets, and erode the value of government bonds posted as collateral.”
- During an interview on CNBC, Jensen Huang, CEO of Nvidia (NVDA), stated that “if you look at the fundamentals, the demand for the neo clouds is off the charts.” However, Huang added, “what is missing in the middle is the working capital to fuel that growth.” We recommend avoiding the neo clouds and moving upstream to the larger cloud providers.
- Flaws have been discovered in Hypertext Preprocessor (PHP), an open-source scripting language that powers 70% of global websites and web applications. This discovery has led governments around the world to issue security warnings and to urge companies to identify vulnerabilities within their software and provide a fix. George Kurz, CEO of Global Cybersecurity company CrowdStrike estimated that this was going to affect “tens of millions of internet-facing servers.” This is also why network cybersecurity companies like CrowdStrike are attractive investment opportunities.
Economic Data That Drove Market Sentiment This Past Week…
- The University of Michigan reported that its Final October Reading of Consumer Sentiment rebounded to 48.0 (-10.4% y/y) from a preliminary October level of 46.3, but slipped from a final September 48.1. The final October expectations component rose to 48.8 (-3.0% y/y) from a preliminary October 47.3 as well as from a final September 46.3. Lastly, the final October current conditions component rose to 46.7 (-20.3% y/y) from a preliminary October 44.7 but fell substantially from the final September 50.9. Survey of Consumers Director, Joanne Hsu, noted that “consumer sentiment held steady this month, registering a scant one-tenth of an index point below September. Increases in sentiment among Republicans and Democrats were balance by declines among independents.” (Source, Univ of Michigan)
- The Conference Board reported that its U.S. Index of Leading Economic Indicators was unchanged in September when compared to August after slipping 0.1% during August. The US LEI has risen 0.6% over the trailing six months, reversing the 1.1% drop over the previous six months. According to Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators at The Conference Board, “five out of the ten components made positive contributions to the LEI in September, led by the interest rate spread and average weekly hours in manufacturing. Nevertheless, these gains were offset by a large decline in consumer expectations.” (Source, The Conference Board)
- Initial Claims for Unemployment Benefits for the week-ended October 17th fell 6,000 to 194,000 from 200,000, which were revised higher by 1,000. Meanwhile, the four-week moving average fell 1,000 to 197,750 from 198,750, which was revised up by 250. Continuing claims for the week-ended October 10th rose 25,000 to 1,728,000 from 1,703,000 the prior week. The continuing claims four-week average rose 4,000 to 1,711,000 from 1,707,000. (Source, U.S. Department of Labor)
- September Housing Starts fell 5.2% or by 67,000 to a seasonally adjusted annualized rate (SAAR) of 1,221,000 from 1,288,000 one month prior (-7.4% y/y). A study completed by Freddie Mac in 2018 estimates that there must be 1.6 million units built annually to account for household growth and to replace existing stock. During September, Single-family housing starts fell 4.6% or 41,000 to 859,000 (2.6% y/y). Meanwhile, Multifamily housing starts fell 7.2% to 349,000 in September (-25.9% y/y) from 376,000 during August. Building Permits, a key barometer for future starts, fell 3,000 to 1,400,000 in September as compared to 1,403,000 during August (-3.0% y/y). (Source, U.S. Census Bureau)
Economic Reports scheduled to be released this week, include the following – on Tuesday, September Orders for Durable Goods, October Consumer Confidence and September New Home Sales; on Wednesday, September Wholesale Inventories; on Thursday, September Personal Income and Spending, Initial Estimate of Third Quarter GDP and Initial Weekly Claims for Unemployment Benefits.
Several potentially market moving companies are scheduled to report earnings, to include Novartis (NVS), Coca-Cola (KO), Microsoft (MSFT), Visa (V), Alphabet (GOOG), Merck (MRK), Caterpillar (CAT), Amazon (AMZN), Eli Lilly (LLY), Mastercard (MA), Intel (INTC), AbbVie (ABBV), AstraZeneca (AZN), Chevron (CVX) and ExxonMobil (XOM).
General Disclosure:“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.”
