- Stocks finished the week higher, with most of the major indexes at or near record levels. Of note was the outperformance of the 493 stocks of the S&P 500 that have been left out of the rally over the past couple of years. In fact, the only major index not within earshot of a record is the Russell 2000 which is comprised of the second and third thousand largest publicly traded companies domiciled in the United States. We believe this rotation does have legs. However, we would not recommend abandoning the leaders but other than incrementally would hold off adding to them at this point.
Tame inflation data (see immediately below) as well as dovish comments from Federal Reserve Chairman Jerome Powell during testimony before the House of Representatives and Senate this past week help to buoy the stock market. During that two day appearance Powell stated that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”On Thursday, the U.S. Bureau of Labor Statistics reported that prices at the wholesale level as measured by thefell 0.2% in June (-0.5% y/y), this after falling 1.4% during May.INTERMEDIATE GOODS was unchanged during June, after rising 0.2% during May and by 2.2% y/y.Prices for core PPI prices fell 0.3% during June after remaining unchanged during May (1.1% y/y).Excluding food and energy, the Finished food prices fell 2.6% during June (-1.3% y/y) after falling 4.6% during May.Energy rose 0.2% during June, this after remaining unchanged during May. Over the past year the PPI has risen 2.6%, up from 2.3% y/y last month, but down from a peak rate of 11.7% during March 2023.PRODUCER PRICE INDEXThis past Friday, the U.S. Bureau of Labor Statistics also reported that The CONSUMER PRICE INDEX fell 0.1% during June (3.0% y/y), this after remaining unchanged during May, but rising by 0.3% in April. The CPI has fallen from a y/y high of 9.1% during June 2022. Energy prices fell 2.0% (1.0% y/y) during June, after falling a like amount during April. Food and beverage prices rose 0.2% during June (2.2% y/y) after rising 0.1% during May. The cost of shelter rose 0.2% during June (5.2% y/y) after rising by 0.4% for four consecutive months. Excluding the cost of shelter, retail prices slipped 0.2% (1.8% y/y). Excluding food and energy, the core CPI rose 0.1% during June, after rising 0.2% during May and 0.3% during April. Over the past year the core CPI has risen 3.3% y/y, well below the peak of 7.6% in February 2022.Our take – Inflation is defined as rising prices, disinflation is defined as slowing inflation and deflation is defined as falling prices. We are certain that many Americans hope for deflation. We say, “be careful of what you wish for” as embedded deflation is just as harmful to the economy as embedded inflation. Just ask the Japanese who exited a thirty year period of deflation within the past couple of years. The time was marked by falling prices and a stock market that went nowhere over that thirty year period. If we could script the change in the price of goods and services over the next two or three quarters, it would be one with slightly falling prices rather than a precipitous drop. After that we would hope for inflation to kick in at an annualized rate of two percent, as that spurs demand.
- On Thursday, according to data gathered by Bespoke Investment Group, “the small-cap Russell 2000 was up 3.5% on the day while the S&P 500 finished down 0.86%. How rare is that? Since its inception in 1979, there have been just one other trading day where the Russell rose more than 3% and the S&P finished lower on the day (10/10/08).” Bespoke added that “within the large-cap Russell 1,000, 11 of the 12 largest stocks were in the red on the day, while 83% of the other 980+ stocks in the index were up.”
- According to the Federal Home Loan Mortgage Corporation (FreddieMac), “Following June’s jobs report, which showed a cooling labor market, the 10-year Treasury yield decreased this week and mortgage rates followed suit. There is also more inventory on the market, including a fair number of listings with price cuts, which is an encouraging sign for prospective buyers.”
Our take – should inflation data continue to remain favorable and interest rates continue to decline, expect to hear talk about the benefits of an Adjustable Rate Mortgage as compared to a Fixed Rate Mortgage. We’ll say it now, “it’s not a bad idea to consider.”
- Upcoming Economic Reports scheduled to be released this week include the following, on Wednesday, June Housing Starts, June Industrial Production and June Capacity Utilization; on Thursday the Weekly Report of Initial Claims for Unemployment Insurance and the June Index of Leading Economic Indicators (LEI).
- The Q3 Earnings Season will arrive in earnest this week! Companies of note scheduled to report this week, include – Blackrock (BLK), Goldman Sachs (GS), Charles Schwab (SCHW), Bank of America (BAC), United Health (UNH), Morgan Stanley (MS), ASML Holding (ASML), Johnson & Johnson (JNJ), Taiwan Semiconductor (TSM), Intuitive Surgical (ISRG), Netflix (NFLX), Blackstone (BX), Novartis (NVS), Abbott Laboratories (ABT) and American Express (AXP).
General Disclosure:“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.”
