· Stocks remained range-bound this past week as investors continue to wade through this seasonally choppy period. After the impressive rebound off the October 2022 lows, expect this type of activity to continue throughout at least the short-term (month, quarter). That said, we don’t think this is a negative as a healthy market is one that is partially defined by rational trading, rather than one driven by emotions.
· According to data from the U.S. Treasury department and research from Apollo, 31% of All U.S. Government Debt Outstanding Matures within the next year. All things equal, as this debt matures it will have to be replaced by higher interest paying securities and more of them as the U.S. deficit has increased. The combination of higher interest rates along with added supply means that a larger percentage of the federal budget must go to servicing that debt.
· According to Morningstar, at the current time the 10-year U.S. Treasury Note is on pace to provide investors with a negative total return (bond price depreciation offset by the interest from the note) for the third consecutive year, the first time this has occurred in 250 years.
· The traditional 60/40 Portfolio is rebounding after a rough 2022 as bonds have stabilized as equity prices have risen. Thus far this year, the Vanguard Admiral Balanced Index Fund (VBIAX) has risen 9.87% after falling 16.90% during 2022. Furthermore, we continue to see opportunity for Growth & Income Investors with a similar asset allocation model as interest rates appear much closer to the top than bottom.
· The death of “king dollar” has been greatly exaggerated as the U.S. currency has rallied for eight consecutive weeks against the Euro and thus far this year, according to Bespoke, “on average across 29 different pairs, local FX [currency] has dropped 293 bps [basis points] versus the dollar this year.”
This rally in the dollar comes amidst some ill-placed concern by some that the rise of the BRIC countries will take down the dollar. Suffice it to say that both Xi Jinping and Vladimir Putin, both of whom did not attend the regular gathering of the G-20 in India this past week, have their own issues to worry about.
· The United States has more gold in reserves than all of the BRIC Countries Combined, this according to data from the International Monetary Fund. At 8,133 tons, the amount of gold held in reserves by the United States far exceeds that of the BRIC Nations (Brazil, Russia, India, China, South Africa, Saudi Arabia, the United Arab Emirates (UAE), Egypt, Iran, Argentina and Ethiopia) which hold 6,600 tons.
· The United Auto Workers (UAW), the union that represents U.S. auto workers remains on strike as they attempt to hammer out a multi-year deal with Ford Motor. In addition to a four-day work week, the UAW is demanding a 40% hike in wages through 2027, including a 20% immediate increase.
· We believe the Fed will not raise rates at its next regularly scheduled meeting this coming Tuesday and Wednesday. We also believe that rates will stay in and around these levels (historically normal) for longer than was originally expected. As noted last week, the Fed has already used its mulligan on inflation when Chair Jerome Powell called it ‘transitory’ back in 2021 and therefore does not want to run the risk of being wrong again. This may in turn keep them more hawkish than the market is currently anticipating. That said, given the ten rate hikes since the first on March 17, 2022, totaling 5.50%, we believe we are at the point in the economic cycle where the Fed will be moving more cautiously, perhaps not at every meeting of the Open Market Committee (FOMC) and in increments of 0.25% as opposed to aggressively. The market can handle this. Fed action from this point forward in the economic cycle is more about messaging and signaling their hawkish intentions as opposed to providing a headwind or tailwind to short-term economic activity.”
· 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 – Those attending Apple’s (AAPL) iPhone launch event this past week were neither disappointed or overly impressed the upgrades to the phone or watch. It appears that most investors are more concerned with the potential to further restrict usage by its citizens. Chip design company ARM Holdings (ARM) at a value of nearly $60 billion, showing that there is still life in the market for Initial Public Offerings (IPO).
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, August Housing Starts and on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, August Existing Home Sales and the August Index of Leading Economic Indicators.
· Second quarter earnings season has begun to wind down. However, several notable companies will report earnings that will provide insight into the health of the economy. These include – FedEx (FDX), AutoZone (AZO), KB Home (KBH), General Mills (GIS), Darden Restaurants (DRI) and Scholastic (SCHL).
“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.”