- Yes, the rally off the October lows appears to be broadening out to include more sectors of the economy as well as the mid- and small-caps. However, it is not leaving the first half leaders, Consumer Discretionary, Communication Services and Technology behind. This is the sign of a healthy market. We have noted continually that “given the more than twenty-percent run off its October 2022 low, we’re probably at the point that stocks will need a catalyst to move substantially higher and that a minor pullback is in order and in fact would be healthy for long-term investors.”
- That catalyst may be the FOMO (fear of missing out) trade as the indexes break out to the upside; and the minor pullback may very well come from higher levels. As our clients and regular Snapshot readers know, Fagan Associates allocates client assets according to their longer-term objectives, concentrating on managing risk over full economic cycles rather than short-term volatility – thereby eliminating the FOMO component. As for minor pullbacks, as we are coming up on our thirty-fourth year in business, we are well aware that they can occur at any time, can come from any level and are to get expected. They are part of the investment process.
- There are always areas of concern and trying to identify those is prudent when managing client accounts. At this time, two of our biggest concerns are 1) the rise in the S&P 500 for the first half of 2023 has added more than $5 trillion in market capitalization (wealth) to investor accounts which in turn may, 2) add more spending power to an already resilient consumer making the job of the Fed in terms of quelling inflation more difficult.
- The Fed 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 5.25%, 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.
- According to Bespoke, the spread between the year/year (y/y) change in consumer prices as measured by the Consumer Price Index (CPI) as compared to prices as measured by the Producer Price Index Finished Goods (PPI) is at an all-time high. Despite the fact that this has reached record levels only seven times, historically it has led to outsized gains in the stock market six of those seven. Bespoke pointed to the fact that this most likely is a result of the abilities of companies to pass through those higher costs to consumers even as their cost increases eased. The result, healthy profit margins.
- Consumer Sentiment, as measured by the University of Michigan surged this past month (see Economic Data below). The director of the survey, Joanne Hsu pointed to the easing of inflation as the primary reason.
- The belief that the Fed may well be able to negotiate a soft landing for the economy is becoming consensus. As long as this either continues or is proven true, should keep a floor under the stock market.
- A Federal Court ruled that the Microsoft could go ahead with its $69 billion of gaming company Activision Blizzard, thwarting the effort by the Federal Trade Commission to block the deal. Rather than hurting competition as put forth by the FTC, Federal Judge Jacqueline Scott Corley said the “evidence points to broader consumer access to games.” As for the tech sector, this may encourage more mergers and acquisitions.
- The value of the dollar slid this past week as a result of easing inflation data. The dollar has also come under pressure lately as the inflation-fighting efforts of the Fed are in line with other central banks.
- Despite news to the contrary, short-term market moves are un-actionable as they are impossible to predict rather than actionable.
- According to data from PwC and Yahoo and gathered by Virtual Capitalist, it took only five days for Meta Platforms’ Threads to reach 100 million users, eclipsing the 2 months it took ChatGPT to reach the same number of users. That compares to Facebook, Spotify, and Twitter which all took more than four years.
- Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, June Retail Sales, June Industrial Production, June Capacity Utilization and June Business Inventories; on Wednesday, June Housing Starts; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance as well as the June Index of Leading Economic Indicators.
- Second quarter earnings swings into full gear this coming week. Companies reporting of note, include – Lockheed Martin (LMT), Charles Schwab (SCHW), Bank of America (BAC), Morgan Stanley (MS), Tesla (TSLA), Netflix (NFLX), Elevance Health (ELV), Goldman Sachs (GS), ASML Holding (ASML), IBM (IBM), Intuitive Surgical (ISRG), Abbott Laboratories (ABT), Taiwan Semiconductor (TWN), Johnson & Johnson (JNJ) and American Express (AXP).
“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.”
