• 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, S&P 500, NASDAQ Composite and Russell 2000 have all fallen 10% from their post-bear market peak set July 31, 2023.  Although we are certainly not complacent, it is noteworthy that “since 1928, the S&P 500 has finished up 10% or more 55 times.  However, in 23 out of those 55 years, there has been a correction from peak-to-trough in that same year of 10% or worse,” this according to Ben Carlson and data from New York University.  Excluding dividends, the S&P 500 has risen 7.04% year-to-date.  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.
  • “It’s all about the bonds, ‘bout the bonds, ‘bout the bonds.” As we scan the internet, are fed information, and listen to or watch the radio or television, we feel inundated by the amount of attention the bond market is getting.  On one hand, we seldom follow the herd mentality as they are often late to the party.  However, on the other and as we have noted quite weekly within our Snapshot for much more than a quarter, bonds merit a look.  We also have noted that to ladder those maturities to include intermediate term issuances of often prudent.
  • 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 the Federal Home Loan Mortgage Corporation (Freddie Mac), “for the seventh week in a row, mortgage rates continued to climb toward eight percent, resulting in the longest consecutive rise since the Spring of 2022.  Rates have risen two percentage points in 2023 alone and, as we head into Halloween, the impact may scare potential homebuyers.  Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and greater inventory.”
  • Should growth investors consider intermediate- to long-term bonds?  We are getting there.
  • Every environment has a temptation.  Right now that “siren song” calling is cash.  We say, use cash for short-term liquidity.  Sure, it is nice that you are getting a return on that cash.  However, cash is not a long-term investment option.  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 to within an earshot of 5%, we recommend laddering bonds in order to add predictability to your stream of future income.
  • The market is continually weighing the promise of AI versus the economics.  This past week economics trumped the promise as several tech stocks slumped.  However, over the longer haul we believe that the promise of AI will fulfill expectations leading to higher relative valuation.  We also believe that the recent weakness in the NASDAQ Composite is more directly correlated (on an inverse basis) with the movement in interest rates (bond market) as opposed to correlated with the earnings of the underlying companies.
  • Over the last two years (Sep 30, 2021), this has been more of a time rather than a price correction for equities but both for fixed income as interest rates have risen back to pre-great recession levels.
  • Your money is not a competition but rather a means to allow you the freedom to do the things you want to do.  It is security and with this in mind, perhaps it is time to lengthen the duration of your fixed income portfolio.
  • 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.
  • 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 newsChevron (CVX) announced Monday (Oct 23) that it has agreed to purchase Hess Corporation (HES) in an all-stock transaction valued at $53 billion, or $171 per share based on Chevron’s October 20, 2023 closing price.
  • Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, October Consumer Confidence from The Conference Board; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance along with September Factory Orders; and on Friday, the October Payroll Report as well as the October Unemployment Rate.
  • Earnings season is in full swing.  Some notable companies reporting Q3 earnings this week include the following – McDonald’s (MCD), Amgen (AMGN), Pfizer (PFE), Advanced Micro Devices (AMD), Caterpillar (CAT), BP (BP), Anheuser-Busch (BUD), Qualcomm (QCOM), Toyota (TM), Shell ADR (SHEL), Apple (AAPL), Eli Lilly (LLY), Novo Nordisk (NVO), ConocoPhillips (COP), Starbucks (SBUX), Booking Holdings (BKNG), Stryker (SYK), and Alibaba (BABA).

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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