This week all came down to the jobs report and from an economic perspective it did not disappoint (for details see below). However, both stock and bond investors responded by selling as the result may ultimately be less monetary accommodation from the Federal Reserve. Some are even suggesting that the Fed may even have to raise rates at some point this year. We would have to see several more months of strong economic data before that becomes our base case. Nonetheless, given the strong stock equity market over the past two years, we all should expect additional volatility.
· We saw quite an accurate definition of a normalized yield curve from the Corporate Finance Institute (CFI). They defined it as “a graphical representation of the link between the yield on bonds and maturities.” Simply put, in a “normal” interest rate environment, depositors as well as creditors are rewarded according to the duration of the investment. For example, investors in a Certificate of Deposit (CD) should receive a higher rate of return if they lock their money up for five years as opposed to one. This has not been the case for several years, in part due to the economic impact of the pandemic along with the accompanying Fed intervention. Generally speaking, a normal yield curve is a sign of economic optimism and a smoothly functioning economy.
We bring up the above as we believe that from the onset of the Great Recession in late 2007, the interest rate environment has abnormal and going forward, we believe that has changed. First, we believe that short-term rates will remain below those of long-term ones as inflation expectations remain elevated. Secondly, we believe that interest rates will not revert back to pre-pandemic levels so get used to more interest on your fixed income investments (CD’s, bonds) but also for the current interest rate on mortgages to remain for the foreseeable future.
· The Fed released their minutes from their December meeting this past Wednesday. Within those minutes, there were two significant statements. 1) “almost all participants judged that upside risks to the inflation outlook had increased and 2) in discussing the outlook for monetary policy, participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing.”
· Mortgage Rates according to the Federal Home Loan Mortgage Corporation (FreddieMac), “in the first full week of the new year, the 30-year fixed-rate mortgage remained elevated at just under 7 percent. The continued strength of the economy has put upward pressure on mortgage rates, and along with home prices, continues to impact housing affordability. The lack of entry-level supply also remains an issue, especially for those looking to become first-time homebuyers.” (Sources, Federal Home Loan Mortgage Corporation, National Association of Realtors)
"It’s The Economy…”
· The Labor Department reported that Non-Farm Payrolls (approximately 80% of the U.S. workforce) for the month of December rose by 256,000, well above the consensus estimate of 150,000. Payroll numbers for the prior two months were revised to 212,000 and 43,000 from 227,000 and 46,000 during November and October, for a net loss of 8,000. The rolling three-month average fell to 170,333 from 172,667, a sign that the labor market remains robust. The Unemployment Rate ticked down to 4.1% during December from 4.2% one month prior. The Unemployment Rate had gotten as low as 3.4% in April 2023. Average Hourly Earnings rose 0.28% or $0.10 to $35.69 during December from $35.59 one month prior and by $1.35 or 3.93% from $34.34 y/y. Average Weekly Earnings rose 0.28% or $3.43 to $1,224.17 during December (3.63% y/y) from $1,220.74 during November. (Source, U.S. Department of Labor)
· The Bureau of Labor Statistics reported that the Job Openings and Labor Turnover Summary (JOLTS) on the last business day of November totaled 8.098 million (-10.3% y/y), up 259,000 from 7.839 million one month prior. Job Openings have fallen from a high of 12.182 million in March 2022. This compares with total hires, which fell 125,000 to 5.269 million, leaving a gap of approximately 2.829 million between job openings and those available to work, up 384,000 from one month prior. (Source, U.S. Bureau of Labor Statistics)
· The Institute for Supply Management’s Composite index of non-manufacturing (service) sector activity rose to 54.1% during December from 52.1% in November. Of note were New Orders (54.2% v 53.7%), Employment (51.4% v 51.5%), Backlog of Orders (44.3% v 47.1%) and Business Activity (58.2% v. 53.7%). The Prices Paid Component surged to 64.4% during December from 58.2% during November. (Source, Institute for Supply Management)
Upcoming Economic Reports scheduled to be released this week include the following: on Tuesday, Inflation at the Wholesale Level as measured by the Producer Price Index (PPI); on Wednesday, Inflation at the Retail Level as measured by the Consumer Price Index (CPI); on Thursday, the Weekly Report of Initial Claims for Unemployment Benefits, December Retail Sales and November Business Inventories; and, on Friday, December Housing Starts, December Industrial Production and December Capacity Utilization.
Here we go again as quarterly earnings season is about kick off. Companies Scheduled to Report Earnings Include – KB Home (KBH), Blackrock (BLK), Citigroup (C), JP Morgan (JPM), Goldman Sachs (GS), Wells Fargo (WFC), Bank of America (BAC), Morgan Stanley (MS), United Health (UNH), Schlumberger (SLB), State Street (STT) and Fastenal (FAST).
“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.”
