· The rotation that began three 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 continuation of the underperformance can be attributed to valuation and perhaps a little too much enthusiasm regarding the monetization of Artificial Intelligence (AI). In our opinion, we believe that this rotation still has some legs but that over the next year the broad market, including the names noted above, will perform well in this broadening rally. As noted last week, “we would not recommend abandoning the leaders but other than incrementally would hold off adding to them at this point.”
· 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 and S&P 500 have fallen 2.11% and 0.03%, but the Dow Jones Industrial Average and small-cap Russell 2000 have risen by 3.76% and 10.37%, respectively. The U.S. Total Market Index has risen 0.71% since the end of June. Moreover, year-to-date and year-over-year, the dispersion between the best performing sectors and the worst as represented by the Select Sector SPDR Exchange Traded Funds (ETFs) has narrowed from 20.82% to 13.32% and from 30.59% to 21.78%. Bullishly, investors are reallocating assets to other sectors rather than selling to remain on the sidelines.
Furthermore, since June 30, nine of the eleven sectors that comprise the S&P 500 as represented by the Select Sector SPDR Exchange Traded Funds (ETFs) have outperformed the S&P 500. That number stood at two on a year-to-date basis at the close of June.
· The Federal Reserve’s Open Market Committee (FOMC) will meet this coming Tuesday and Wednesday. At its conclusion, they will most likely signal a cut in rates following their September 17-18 meeting as long as the inflation data continues to be benign.
· Investors will see if concerns over Alphabet’s (GOOGL) earnings this past week were just a blip on the screen or the start of a slowdown in tech as AI heavy tech companies including Microsoft (MSFT), Advanced Micro Devices (AMD), Qualcomm (QCOM), Meta Platforms (META), Arm Holdings (ARM), Amazon (AMZN) and Apple (AAPL) all report Q2 earnings this coming week. Overspending on cap-ex was the main concern investors concluded from GOOGL’s earnings, especially after CEO Sundar Pichai noted that “the risk over underinvesting is dramatically greater than the risk of overinvesting for us here, even in scenarios where if it turns out that we are overinvesting.”
· Second Quarter Gross Domestic Product (initial estimate), as reported by the Commerce Department, a tally of the output of all goods and services in the United States, rose at an annualized rate of 2.8%, double the 1.4% during Q1and as compared to 3.1% y/y. Real Final Sales to Domestic Purchasers rose 2.7% during Q2, up from 2.4% during Q1 and versus 3.0% y/y. Government Spending (Government Consumption Expenditures and Gross Investment) rose at an annualized rate of 3.1%, up from 1.8% during Q1 and as compared to 3.8% y/y. Inventory Effect added a 0.82 percentage points during Q2, following a 0.42% subtraction during the first quarter. The closely watched Personal Consumption Expenditures (PCE Price Index) rose at an annualized rate (SAAR) of 2.6% (2.6% y/y) during Q2 versus 3.4% during Q1. The PCE Price Index Excluding Food and Energyrose at an annual rate of 2.9% during Q2(2.7% y/y), down from 3.7% during Q1. (Source, U.S. Bureau of Economic Analysis)
· Sales Of Existing Homes fell 5.4% to a Seasonally Adjusted Annualized Rate (SAAR) of 3.89 million units during June from 4.11 million during May. Over the past year Sales of Existing Homes have fallen 5.4% from 4.11 million, but are off their lows of 3.85 million in October 2023 According to the National Association of Realtors (NAR) “total housing inventory registered at the end of June was 1.32 million units, up 3.1% from May and 23.4% from one year ago (1.07 million). Unsold inventory sits at a 4.1-month supply at the current sales pace, up from 3.7 months in May and 3.1 months in May 2023. The last time unsold inventory posted a four-month supply was May 2020 (4.5 months.)” Further along, the report noted that “the median existing home price for all housing types in June was $426,900, an all-time high and an increase of 4.1% from one year ago ($410,100).” (Source, National Association of Realtors).
· Comments from the National Association of Realtors Chief Economist Lawrence Yun raised some eyebrows as Yun noted that “we’re seeing a slow shift from a seller’s market to a buyer’s market. Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis.”
· According to the Federal Home Loan Mortgage Corporation (FreddieMac), “mortgage rates essentially remained flat from last week but have decreased nearly half a percent from their peak earlier this year. Despite these lower rates, buyers continue to pause, as reflected in tumbling new and existing home sales data.” In our opinion this pause is not a surprise as quite often when homebuyers see rates come down, they wait and hope for a further drop. They will wait only so long until deciding whether to act.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, July Consumer Confidence and the June Job Openings and Labor Turnover Survey (JOLTS); on Thursday the Weekly Report of Initial Claims for Unemployment Insurance and June Construction Spending; and, on Friday, July Non-Farm Payroll Report, July Unemployment Rate and June Factory Orders.
· The Q2 Earnings Season continues to roll along. Companies of note scheduled to report this week, include – McDonalds (MCD), Pfizer (PFE), Microsoft (MSFT), Procter & Gamble (PG), Merck (MRK), Advanced Micro Devices (AMD), Qualcomm (QCOM), Mastercard (MA), Meta Platforms (META), Arm Holdings (ARM), Amazon.com (AMZN), Toyota Motor (TM), Apple (AAPL), Shell (SHEL), Chevron (CVX) and ExxonMobil (XOM).
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.”
