· Stocks generally moved lower this past week as the yield curve flattened (see below). True to form, utilities absorbed the brunt of the selling, but counter to the previous week, the long-duration technology laden NASDAQ Composite as well as the mid-cap Russell 2000 both eked out fractional gains. All in all, despite the headline risk, the recent bout of selling seems contained as we enter the seasonally strong fourth quarter. Perhaps we can work our way toward the upper boundary of what appears to be a trading range. The bottom line is that the market continues to digest the sizable bounce off the October 2022 lows as it awaits more clarification from the Fed.

· 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%.

· 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%.

· As a result of the flattening yield curve, specifically an increase in rates along the intermediate- and long-term maturities, the Dow Jones Utility Average fell 6.28% this past week to pre-pandemic levels. At some point in time (not quite yet), they will be a buy. However, at this point we will just watch and wait for the blood-letting. Thankfully, Fagan Associates has less than 0.50% allocated to this sector, far below the weighting of the industry within the S&P 500.

· According to oil services company Baker Hughes, oil and natural gas rig counts fell by 7 to 623. Thus far this year, the number of rigs has fallen by 156 from 779 and by 142 from 765 over the past year. Despite the potential for a technical pullback in oil, the drop in rigs is a secular tailwind to prices.

· According to the Federal Home Loan Mortgage Corporation (Freddie Mac), interest on the 30-year fixed rate mortgage climbed to 7.31% for the week ending September 28 and in doing so marked the highest level since the year 2000. The government agency went on to note that “unlike the turn of the millennium, house prices today are rising alongside mortgage rates, primarily due to low inventory. These headwinds are causing both buyers and sells to hold out for better circumstances.”

· Japan’s 10-year Government Note climbed to 0.771% at the close on Friday, up from 0.749%, 0.416% and 0.025%, this past week, thus far this year and from the close of 2020, respectively. With a debt to GDP ratio of 225%, one can see why rising interest rates are an issue for the Japanese economy.

· 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 18.30% to 4.59% 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.

· 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 – Peleton (PTON) shares climb on the announcement of a digital content deal with athleisure giant Lululemon (LULU); despite missing on revenues, shares of footwear company Nike (NKE) jumped 6.68% as earnings per share came in above expectations and revenue in China climbed 5% y/y; Costco (COST) is selling gold bars as a courtesy to their customers. In addition to the $1,850 or so for an ounce of gold, we remind those shopping at Costco to bring an extra $1.50 for a hot dog.

· Assuming the government does NOT shut down, the Upcoming Economic Reports scheduled to be released this week include the following, on Monday, August Construction Spending; on Tuesday, September Job Openings and Labor Turnover Survey (JOLTS); on Wednesday, August Orders for Durable Goods and August Factory Orders; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and the August Trade Balance and on Friday, the September Non-Farm Payroll Report, September Unemployment Rate and August Consumer Credit.

· Consider this week and next the lull before the third quarter earnings storm kicks off the week of October 12. However, some notable stragglers include the following – McCormick (MKC), Cal-Maine Foods (CALM), Helen of Troy (HELE), Constellation Brands (STZ), Levi Strauss (LEVI) and Conagra Brands (CAG).

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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