- After a quiet start to the week in anticipation of the Fed’s two-day FOMC meeting (see below), stocks sold off as the specter of higher interest rates for longer sent equity and fixed income investors to the sidelines pushing stocks down and interest rates higher. As we have noted continually over the past many weeks, we continue to believe that the sideways to downward leaning move will continue, as after the gains reaped during the first half of 2023, it is time for a breather. That may continue for a bit as we digest those gains as well as get some clarity regarding future Fed policy.
- The Open Market Committee of the Federal Reserve (FOMC), the body that determines the direction of interest rates, concluded a two-day regularly scheduled meeting this past Wednesday and decided to leave interest rates unchanged at 5.25%. Despite the widely anticipated result, the Policy Statement along with the post-meeting press conference conducted by Fed Chair Jerome Powell struck hawkish tones which unnerved Wall Street. These include:
- “We want to see convincing evidence that we have reached the appropriate level, and we’re seeing progress and we welcome that. But, you know, we need to see more progress before we’ll be willing to reach that conclusion.”
- “We are prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we are confident that inflation is moving down sustainably toward our objective.”
- It is also interesting to note that the four-page, eleven paragraph Transcript of Chair Powell’s Press Conference Opening Statement referenced their goal of getting “inflation back down to our 2 percent goal” seven times.
- In addition to having raised interest rates to 5.25%, the Fed has also slowed economic growth by reducing the size of its bloated balance sheet by $815 billion since June 2022. They do so by not issuing securities to replace those that mature and also by selling fewer securities to the marketplace. Presently that balance sheet is a little over $8 trillion, just about double where it was just before the pandemic.
- 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 12.52%.
- 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.
- General Motors issued a statement Motors late Thursday evening to the United Auto Workers (UAW – “it’s now clear that the UAW leadership has always intended to cause months-long disruption. UAW leadership needs to put the interests of its members and the country over their own ideological and personal agendas.” The rhetoric seems to be heating up which may make negotiations more difficult.
- The yield curve continues to flatten as intermediate and longer-term bond yields rise in response to the belief that the Fed will have to keep interest rates higher for longer in order to quell inflation. In fact, since the close of last year the yield on the 10-Year U.S. Treasury Note has risen 14.43% to 4.44% from 3.88% which, in turn, results in a negative total return. As noted last week, according to Morningstar, should the 10-year note provide investors with a negative total return for the entirety of 2023, it will mark the third consecutive year in which it has done so, the first time this has occurred in 250 years.
- 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.
- After fourteen consecutive interest rate hikes, in a vote of 5-4 the Bank of England decided to leave interest rates at 5.25%, a fifteen year high. The four members would have rather the BOE raise rates by 0.25%. In a prepared statement the bank noted that its decision was based upon the fact that in their opinion “there are increasing signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally.”
- 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 – Grocery delivery company Maplebear, Instacart’s parent company (CART) came public this past week and performed relatively well given the overall negative tone of stocks this past week. Cisco Systems (CSCO) agreed to purchase cybersecurity company Splunk (SPLK) for $258 billion.
- Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, August New Home Sales, M2 Money Supply and September Consumer Confidence; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and Q2-GDP (Second Revision) and on Friday, August Personal Income & Spending along with September Consumer Sentiment from the University of Michigan.
- 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 – Thor Industries (THO), Costco (COST), Cintas (CTAS), Paychex (PAYX), Micron Technology (MU), Worthington (WOR), Vail Resorts (MTN), Nike (NKE), Accenture (CAN), Jabil Circuits (JBL), CarMax (KMX) and Carnival (CCL).
“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.”