- The NASDAQ Composite closed out the week at a record high, the catalyst of which was positive news from Apple, Adobe, Broadcom and Oracle, along with momentum, which has been to the upside since the October 2023 lows. Earlier in the week the S&P 500 as well as the U.S. Total Market Index also closed at record highs. All three have risen more than ten percent thus far this year.
- Interest rates have also come down as just over the past week there have been five positive data points in regard to inflation. They include 1) a week ago Friday the Department of Labor reported that the Unemployment Rate rose to 4.0% during May, its first time at or above that level since November 2021 when it was 4.1%. A cooling labor market will put less upward pressure on wages. 2) Wednesday’s report on retail inflation as measured by the Consumer Price Index (CPI) which remained unchanged during May and actually declined a bit if you strip out the cost of shelter. 3) The release of wholesale inflation as measured by the Producer Price Index (PPI) which fell 0.2% during May. 4) Also, on Thursday it was reported by the Department of Labor that Initial Claims for Unemployment Benefits rose by 13,000 to 242,000 the highest level since the week ended August 12, 2023. 5) Friday the U.S. Bureau of Labor Statistics reported that both Import and Export prices fell during May and over the past year have edged up meaninglessly.
- As investors we believe it will pay to wait before singing “ding-dong inflation’s dead” (never liked The Wizard of Oz) as the majority of the U.S. economy is service-based and wage inflation may remain sticky. However, we do believe the worst of inflation is behind us for this economic cycle which will eventually enable the Fed to ease monetary policy.
- Time will tell, but for now it is not wise to step in front and broadly sell into this momentum, which remains to the upside. That said, it is our belief that stocks and bonds seem reasonably valued. As such, we continue to recommend scaling into secular growers on weakness; nibbling at value stocks, especially those that will benefit from utilizing technology to reduce operational costs and laddering fixed income. We expect the summer to be choppy as volume contracts, the election approaches and the accompanying rhetoric heats up.
- The Open Market Committee of the Federal Reserve (FOMC) concluded its’ regularly scheduled two-day meeting on Wednesday, deciding to the target rate for the federal funds rate at between 5¼ to 5½ percent where it has been since the Fed last hiked rates on July 26, 2023. As part of its post-meeting statement the Fed noted that “recent economic indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year, but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2-percent inflation objective.”
- At this time, we believe the financial market will do just fine in a “higher for longer” environment.The Fed has two more regularly scheduled meetings prior to the election, July 30-31 and September 17-18 and one the day after the election, November 6-7. At this point we believe there won’t be enough data to cut interest rates at the July meeting so the next opportunity, barring a between-meeting-cut will be following the September one. The FOMC has repeatedly stated that they are data dependent and that is not truer than now as they don’t want to retain real (inflation adjusted) interest rates at a level where it chokes off economic growth but also don’t want to let the inflation genie out of the bottle a la the 1970s by cutting too soon. In our opinion and given their post-pandemic policy missteps, they will most likely leave interest rates higher for longer.
- The quote, “insanity is doing the same thing over and over and expecting different results” is widely attributed to Albert Einstein but may also apply to investors that over-weight value as compared to growth. A case in point is the difference in performance of two index funds, the Schwab U.S. Large-Cap Growth ETF (SCHG) as compared to the Schwab U.S. Large-Cap Value ETF (SCHV) with the former outpacing the latter substantially over any statistically meaningful period. The largest holdings in SCHG include Microsoft, Apple, Nvidia, Amazon and Meta Platforms while the top five in SCHV are Berkshire Hathaway, JP Morgan Chase, ExxonMobil, Procter & Gamble and Johnson & Johnson. Although all ten are well-managed, well respected entities, there can be no doubt that investors have been riding the momentum of the first five as compared to the second. The question for us is “do we continue in this new paradigm where technology (growth) remains the driving force behind domestic economic growth or will onshoring/nearshoring cause a shift in where investors place their dollars.” Finally, is the fact that we are just considering the above a sign that the end is near in regard to the outperformance of growth versus value? The truth is probably somewhere in between as the performance of tech certainly deserves to take a break after a record run but over the long-term still looks attractive as do some of the value plays.
- “The average mortgage payment of principal & interest in April rose 5.7% (12.9% y/y) to $2,209 from $2,090 in March. The median price of an existing single-family home increased 3.9% (5.6% y/y) to $412,100 in April after rising 2.2% in March. The monthly mortgage outlay equaled 26.1% of median family income versus 24.7% in March, though that was down from a high of 27.4% in October. The monthly mortgage rate of 7.07% compared to 6.90% in March. It remained below a high of 7.70% in October. Median family income improved 0.1% (5.0% y/y) to $101,663 from $101,556 in March.” (Quoting from Haver Analytics and according to data from the National Association of Realtors)
- According to the dictionary FOMO or Fear of Missing Out is defined as the anxiety that an exciting or interesting event may currently be happening elsewhere, often aroused by social media. Although at some point in time we ALL feel FOMO, as an investor, steering clear of reacting to this urge is usually a wise decision as not doing so historically results in poor short-term performance. We recommend waiting until the security is out of the news for a while and whose price action has come off the boil. In addition, should you choose to invest in a security that has greatly appreciated or has gone parabolic we recommend scaling in, leaving room to add should the price of the security correct. In our opinion, the best way to invest is to assemble a portfolio based upon your objectives, establishing a discipline as to a maximum allowable percentage in any one security and then trimming that position should that percentage be exceeded.
- According to the Federal Home Loan Mortgage Corporation (FreddieMac), “mortgage rates continued to fall back this week as incoming data suggests the economy is cooling to a more sustainable level of growth. Top-line inflation numbers were flat but shelter inflation, which measures rent and homeownership costs, increased showing that housing affordability continues to be an ongoing impediment for buyers on the house hunt.
- Should inflation data continue 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"
- Corporate news – Apple (AAPL) conducted its annual Worldwide Developers Conference this past week with investors celebrating the focus that the company was placing on Artificial Intelligence (AI). Illustrating the power of the allure of AI, shares of Adobe (ADBE), Broadcom (AVGO) and Oracle (ORCL) all jumped as earnings were driven by substantial increases in AI related demand.
- Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, May Retail Sales, May Industrial Production & Capacity Utilization and April Business Inventories; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance along with May Housing Starts; and on Friday, May Existing Home Sales and the May Index of Leading Economic Indicators from The Conference Board.
- The Q1 Earnings has slowed to a trickle. However, companies of note scheduled to report this week, include – Lennar (LEN), KB Homes (KBH), Steelcase (SCS), Winnebago (WGO), La-Z-Boy (LZB), Kroger (KR), Darden Restaurants (DRI), Jabil (JBL) and CarMax (KMX).
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.”
