- As analysts have raised their price targets for the S&P 500 and Investor Sentiment as registered by the American Association of Individual Investors has improved to their highest level in two years, it is not surprising that stocks took a breather this past week as historically, markets climb a wall of worry. It’s time for a breather. Let’s hope we get one as the angst created by a modest pullback will provide the bricks needed to rebuild that wall.
- At this time we believe the Fed will not raise rates at its next regularly scheduled meeting September 19-20. 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.”
- To the above we will add that 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.
- The markets are pricing in a soft landing, but most likely have not priced in either a hard one or for that matter a reacceleration of economic activity. That said, in our opinion a soft landing will also include turbulence on the descent in the form of decelerating corporate earnings, a weakening labor market and credit issues. The bottom line, let’s not confuse a soft landing with smooth sailing. At this point, we believe the financial markets are fairly valued.
- Rating agency Fitch downgraded US Debt from AAA to AA+ noting that the “repeated debt-limit standoffs and last-minute resolutions have eroded confidence in fiscal management.” However, in our opinion as the rest of the world basically relies on America for almost everything (currency stability, defense, technological innovation, food, medical discoveries, etc…), if the U.S. is not the most secure currency in the world, it is hard to imagine what nation might be. Nonetheless, we are on an unsustainable path in regard to our national debt and it is good to be reminded of that. Perhaps our politicians will heed this downgrade and get to work fixing this problem.
- It is possible that the yield curve will remain inverted (short-term interest rates higher than long-term), but less so than as it exists today as short-term rates should decline more precipitously than intermediate or long term rates given the increasing U.S. deficit.
- Utilities fell sharply on the Fitch downgrade resulting in rising Treasury rates. In our opinion, the sector, which has fallen year-to-date, should not be considered a safe haven for equity investors as valuations are rich and there are alternatives elsewhere.
- Mortgage rates, we couldn’t have said it any better. According to FreddieMac, “the combination of upbeat economic data and the U.S. government credit rating downgrade caused mortgage rates to rise this week. Despite higher rates and lower purchase demand, home prices have increased due to very low unsold inventory.”
- According to Bloomberg, “the combined total amount of Treasury bills, notes and bonds outstanding increased by about 1% during July to a record $25.137 trillion, according to data released Friday. It’s poised to continue to mount. As recently as June 2020, total marketable debt outstanding was under $20 trillion. It was $15 trillion as recently as June 2018. Borrowing increased sharply in 2018 to finance tax cuts and surged in 2020 to finance the federal pandemic response. Now it’s expanding in part because higher interest rates have inflated the cost of servicing the existing debt.”
- 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 hovering around 4%, we recommend laddering bonds in order to add predictability to your stream of future income.
- Corporate news – Advanced Micro Devices (AMD) reported better than expected earnings. After spiking shortly thereafter the stock fell along with the broader market. Amazon (AMZN) rose on strong earnings on the back of strength in web services. Apple (AAPL) beat expectations, mostly on cost containment. However, revenue fell y/y for iPhone, Macs and iPads.
- Upcoming Economic Reports scheduled to be released this week include the following, on Monday, June Consumer Credit; on Tuesday, June Balance of Trade and June Wholesale Inventories; on Thursday, July Retail Inflation as measured by the Consumer Price Index (CPI) and the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, July Wholesale Inflation as measured by the Producer Price Index (PPI).
- Second quarter earnings season is in full swing. Companies reporting of note, include – Tyson Foods (TSN), Palantir Technologies (PLTR), Paramount Global (PARA), Skyworks (SWKS), Global Foundries (GFS), Eli Lilly (LLY), Under Armour (UAA), UPS (UPS), Take-Two (TTWO), Wynn Resorts (WYNN), Sealed Air (SEE), Jack In the Box (JACK), Roblox (RBLX), Wendy’s (WEN), The Trade Desk (TTD), Walt Disney (DIS), CyberArk (CYBR), and Ralph Lauren (RL).
“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.”
