· Did we skip spring and move right into the dog days of summer? From the lack of volatility in the financial markets shortly after the collapse of Silicon Valley Bank (SIVB) in early March, some might think that the case. Others would suggest that the lack of volatility is preparing for a sharp move (coiled spring) one way or the other. After a difficult 2022 during which technology stocks lagged the S&P 500 considerably as the trajectory at which the Fed hiked rates challenged secular growth investors, they have been the leaders thus far in 2023 as inflation has waned resulting in lower interest rates.
We may get at least a partial answer to the question posed above, better framed as “is the stock market fairly valued or poised for a major move, one way or the other” this coming week as the leaders in the technology sector, namely, Microsoft, Amazon, Meta Platforms, and Alphabet all report earnings. (After a week lag, Apple is set to report May 4.) Despite the increased volatility that may be associated or with other earnings reports, we believe the financial markets are more or less fairly valued. However, over the intermediate- to long-term stock price follows earnings and we believe the trajectory to be up. We also believe that the returns achieved by investors in the stock market will be higher than those invested elsewhere, including bonds and cash. However, we will also state that bonds and cash do offer attractive alternatives for some percentage of one’s assets as we have gone from a TINA (There Is Not Alternative) environment in regard to equities to TARA (There Are Real Alternatives). Generally speaking, those real alternatives (bonds and cash) should comprise a minority position in one’s portfolio as they tend to lag the pace of inflation.
These days, the media makes it very difficult for one to exhibit patience. However, when investing, historically it pays off in spades, especially over the longer-term as we believe that on balance, we have emerged from a bear market to one that can be bought on weakness if you can remain patient during volatile times, which are always sure to come.
· House Speaker Kevin McCarthy unveils some details of plan to raise debt limit. Quoting from Barron’s, “the plan would raise the borrowing limit by $1.5 trillion in exchange for limiting future spending growth, putting work requirements on Medicaid, and removing the funds allotted to the Internal Revenue Service and the clean energy tax credits that were part of the Inflation Reduction Act, among other provisions.” It’s progress.
· Fed minutes project a recession later this year. According to the Fed minutes from the March meeting, “given their [FOMC Members] assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.” We believe that investors began anticipating this during 2022 when the S&P 500 bottomed 25% from its highs and are now looking past it the almost certain slowdown.
· This is the “old new normal” and we all just have to get used to it. In regard to interest rates, Post Great Recession through the end of 2021 was a historic anomaly and the sooner you realize this and begin to function in this world you’ll be better off. In fact, except for a brief period post 9/11, the yield on the 10-Year U.S. Treasury Note spent the entirety of the 50-plus year period beginning 1964 and culminating with the Great Recession above 4.00%.
· FreddieMac on mortgage rates. “For the first time in over a month, mortgage rates moved up due to shifting market expectations. Home prices have stabilized somewhat, but with supply tight and rates stuck above six percent, affordable housing continues to be a serious issue for potential homebuyers. Unless rates drop into the mid five percent range, demand will only modestly recover.”
· King Dollar is not dead! Despite the potential and perhaps even the reality of the BRIC Countries (Brazil, Russia, India and China) establishing an alternative to the U.S. Dollar, it is hard to believe that democratically elected countries that comprise two-thirds of global GDP would place their trust and confidence in the BRICs, especially China. That said, the dollar index which sits within approximately ten percent of a decade high set during September, 2022 has weakened recently and could come under continued, normal pressure as interest rates abroad have risen, attracting flows out of the dollar.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, March Housing Starts; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and March Existing Home Sales and then finally, on Friday, the Index of Leading Economic Indicators (LEI).
· This week all eyes will be focused on earnings as some large cap market moving names will be reporting. They will most likely provide an indication of the strength of the economy. Amongst others, they include Coca-Cola (KO), First Republic (FRB), PepsiCo (PEP), Alphabet (GOOGL), Microsoft (MSFT), General Motors (GM), 3M (MMM), General Electric (GE), Visa (V), McDonalds (MCD), Thermo Fisher Scientific (TMO), Meta Platforms (META), Norfolk Southern (NSC), Boeing (BA), Intel (INTC), Caterpillar (CAT), Honeywell (HON), Amgen (AMGN), Merck (MRK), AbbVie (ABBV), Eli Lilly (LLY), Mastercard (MA), Amazon (AMZN), Chevron (CVX) and Exxon Mobil (XOM).
“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.”
