· The broad stock indexes moved fractionally lower, a surprise to many including us, who would have thought that given the stronger than expected inflation numbers at both the retail and wholesale levels as measured by the Consumer and Producer Price Indexes (see below), they would have declined even more, especially given the fact that the S&P 500 had risen fourteen of the past fifteen weeks. The sticky inflation data was highlighted by a 0.7% rise in retail prices for services less energy and a 0.6% jump in that same component on the wholesale side. This is something that the Fed will have to contend with, which may in turn keep them from cutting rates until well into the second quarter, if not later. We believe that the stock market can handle “higher rates for longer” as long as corporate earnings remain sufficient enough to justify current valuations at or near these levels, which we believe likely.
Presently, we would welcome a market that bides time by moving sideways or perhaps drifting somewhat lower as it would work off the excesses created as a result of the more than 20% move from the October 27, 2023 bottom, allowing bullish sentiment to cool a bit.
· Given the pace of economic activity along with the strength of the stock market, there is a good chance that when the Fed cuts interest rates they will not do so in a linear fashion, but more in a cut and then wait-and-see pattern. Despite the fact that many believe the Fed will cut over several consecutive meetings, we do not consider it a fait accompli nor do we consider it a prerequisite for continued market gains.
· Thursday, after the release of the stronger than expected Consumer Price Index (retail inflation) but before that of the Producer Price Index (wholesale inflation) which also registered numbers that were above expectations, mortgage rates rose for a 30-year term to 6.77% while that for a 15-year rose to 6.12%, this according to data from FreddieMac. However, after the release of the PPI, that of the thirty year surged to over 7.00%, this according to various providers.
· Many times a turn in the tide is accompanied by choppy water and perhaps should the Russell 2000 (the second and third thousand largest publicly traded stocks domiciled in the United States) begin to lead after three years of lagging, investors may look back on this past week as the turning point. On the surface, despite outperforming the larger S&P500, the week was relatively mundane as the Russell advanced by 1.13%. However, it either rose or fell daily by an average of 2.40%, the least of which was a decline of 1.39% on Friday. Our current take is not to get too excited as investors will most likely stay with the large cap trade as the economy slows.
· More stocks rose than fell this past week as is evidenced by the NYSE and NASDAQ Advance/Decline Line, the 93/45 breadth of the U.S. Total Market Industry Groups and the fact that of the 11 Select Sector SPDR ETFs (covering the entirety of the S&P500), all sectors rose except for those that led during 2023 (Communication Services, Technology and Consumer Discretionary) and Real Estate. The market appears to be broadening out as more sectors contribute to the gains, which historically is quite positive. The health of the equity markets can also be seen in the recent outperformance of last year’s laggards, namely Health Care, Financials, Industrials and Energy.
· Market leadership will receive a stiff test this week as Graphic Processing Unit (GPU) giant Nvidia (NVDA) reports earnings on Wednesday. The maker of computer chips necessary for AI machine learning, PC graphics, video games and cryptocurrency mining is expected to earn $4.59 per share on revenue of approximately $20.4 billion. Shares of NVDA have risen nearly 50% already in 2024 and any sign of a slowdown will most likely result in a pullback in these shares as well as others attached to AI. Investors will not only keep a close eye on earnings, but also the company’s projections for the next few quarters.
· There won’t be a bell rung at the top just as one was not sounded at the bottom which is the reason that trimming winners is prudent portfolio management. We realize that it isn’t easy and that clients tend to look more at the shares of securities sold rather than the ones that remain in their portfolios. Certainly our goal is to keep pace with the appropriate indexes. However, our overriding concern is to help clients achieve and retain financial independence in the most efficient way, all the while shouldering a level of risk that conforms to their mutually- agreed upon needs and tolerance to risk.
· After a furious rally off the October 2022 lows, interest rates have been trading within a range indicating to us that, at least for now, perhaps the easy money has already been made in the bond market. Those looking to get in on the long end of the yield curve should wait for more data to see if inflation is indeed cooling to the extent to warrant such an investment.
· Corporate news –Bitcoin, the darling, devil and now the darling again of Wall Street rose above $50,000 this past for the first time in over a year as inflation has ebbed, rekindling the risk trade. Despite the recent surge, now as in the past we consider this a speculative trade and would therefore limit exposure to under 2% of portfolio value. It wasn’t all wine and roses on Valentine’s Day as drivers of many ride-hailing companies, Uber (UBER), Lyft (LYFT) and DoorDash (DASH) struck over wages and safety.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, the Index of Leading Economic Indicators from the Conference Board and on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and January Existing Homes Sales.
· The current earnings cycle has peaked and begun to wind down. Nevertheless, several companies of note are reporting this week, to include – Walmart (WMT), Home Depot (HD), Palo Alto Networks (PANW), Medtronic (MDT), Analog Devices (ADI), Nvidia (NVDA), EOG Resources (EOG), Vale (VALE), Pioneer Natural Resources (PXD), Mercadolibre (MELI), Booking Holdings (BKNG), and Intuit (INTU).
“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.”
