· The rotation that began a couple of weeks ago continued into this week as those sectors that lagged, namely anything but the so-called Magnificent 7 (Nvidia, Microsoft, Alphabet, Amazon.com, Meta Platforms, Apple and Tesla) became leaders. The leaders included the mid- and small-cap sectors as well as the companies that comprise the Dow Jones Industrial Average. As noted last week, “we would not recommend abandoning the leaders but other than incrementally would hold off adding to them at this point.”
· A number of issues could have provided the catalyst for the slump in the NASDAQ including President Biden’s comments around further restrictions on China’s access to chip technology; former President Trump’s nomination of J.D. Vance as his Vice-President as Vance has espoused non-traditional Republican ideas on big business; or what we believe is most likely good old profit-taking. Giving credence to this belief is data related by MFS (Source; Bespoke) that “the S&P 500 (cap-weighted) outperformed the S&P 500 Equal Weight index by 13.4 percentage points in the six months ending July 5. This spread has only been above 13 on 11 other trading day since 1990, and they all occurred between December 1999 and March 2000.
· Rotation where investors stay invested is good and is historically indicative of a healthy market. This is exactly what has transpired since the beginning of July as the NASDAQ Composite is flat but the Dow Jones Industrial Average and small-cap Russell 2000 have risen by 2.99% and 6.67%, respectively. In addition, year-to-date, the dispersion between the best performing sectors and the worst as represented by the Select Sector SPDR Exchange Traded Funds (ETFs) has narrowed from 21.21% (Technology, Real Estate) to 15.17% (Communication Services, Real Estate). Investors are reallocating assets and not selling to then remain on the sidelines.
· A fault within software that cloud cybersecurity giant Crowdstrike used to update client computers caused a global blackout that spread across industries. Company officials were certain to assure customers that it was a software issue and not a hack. CEO George Kurtz stated that “the issue has been identified, isolated and a fix has been deployed.”
· Investor sentiment seems to have gotten ahead of itself as bullish sentiment has pushed past fifty percent (see below). Historically, this is a contrary indicator. Food for thought.
· Given that monetary policy works with “long and variable lags,” Federal Reserve Chair Jerome Powell noted that “if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%”. Powell made these comments while speaking at the Economic Club in Washington, D.C. this past week.
· HOUSING STARTS increased 3.0% or by 39,000 to a seasonally-adjusted annualized rate (SAAR) of 1,353,000 during June, as compared to 1,314,000 in May (-4.4% y/y). Of note is the fact that there must be approximately 100,000 housing starts per year to replace those lost to natural causes, man-induced causes or by the growing U.S. population. During June, Single-family housing starts fell 2.2% or 22,000 to 980,000 from 1.002 million (5.4% y/y). Meanwhile Multifamily housing starts rose 19.6% to 373,000 in June from 312,000 during May (-23.1% y/y). BUILDING PERMITS, a key barometer of future starts, rose 3.4% or 47,000 to 1,446,000 in June from 1,399,000 (-3.1% y/y). (Source, U.S. Census Bureau)
· The Conference Board reported that its U.S. INDEX OF LEADING ECONOMIC INDICATORS fell 0.2% during June (-4.8% y/y), after slipping 0.4% during May. Over the past six months the LEI has fallen 1.9%. According to Justyna Zabinska-La Monica, Senior Manager, Business Cycles Indicators, at the Conference Board, “the U.S. LEI continued to trend down in June, but the contraction was smaller than in the past three months. The decline continued to be fueled by gloomy consumer expectations, weak new orders, negative interest rate spread, and an increased number of initial claims for unemployment. However, due to a smaller month-on-month rate of decline, the LEI’s long-term growth has become less negative, pointing to a slow recovery.” (Source, The Conference Board)
· According to the Federal Home Loan Mortgage Corporation (FreddieMac), “the 30-year fixed-rate mortgage fell to its lowest level since mid-March, dropping 12 basis points from last week. Mortgage rates are headed in the right direction and the economy remains resilient, two positive incremental signs for the housing market. However, homebuyers have yet to respond to lower rates, as purchase application demand is still roughly 5 percent below Spring, when rates were approximately the same. This is not uncommon: sometimes as rates decline, demand weakens, and the apparent paradox is driven by buyers making sure rates don’t decline further before they decide to purchase.”
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 Tuesday, June Existing Home Sales; on Wednesday, June New Homes Sales; on Thursday the Weekly Report of Initial Claims for Unemployment Insurance, June Orders for Durable Goods and the Initial Report on Q2 Gross Domestic Product (GDP); and, on Friday, June Personal Income and Spending and the Preliminary Report on Consumer Sentiment from the University of Michigan.
· The Q2 Earnings Season continues to roll along. Companies of note scheduled to report this week, include – Verizon (VZ), Alphabet (GOOGL), Coca-Cola (KO), Comcast (CMCSA), Danaher (DHR), Freeport McMoRan (FCX), GE Aerospace (GE), General Motors (GM), Lockheed Martin (LMT), Texas Instruments (TXN), United Parcel (UPS), Visa (V), AT&T (T), Chipotle Mexican Grill (CMG), Ford Motor (F), GE Vernova (GEV), General Dynamics (GD), IBM (IBM), NextEra Energy (NEE), AbbVie (ABBV), American Airlines (AAL), Honeywell (HON), 3M (MMM), Bristol Myers (BMY), Union Pacific (UNP) and Colgate Palmolive (CL).
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.”
