· After selling off Wednesday afternoon, immediately following hawkish post- Federal Open Market Committee (FOMC) Meeting comments from Fed Chair Jerome Powell, the financial markets pushed higher, perhaps not taking the members of the committee seriously that they expect the Fed Funds Rate to hit 5.60% by the end of this year. It is currently at 5.00%, which suggests two more one-quarter point hikes. We would not underestimate the resolve of the FOMC as perhaps they will overtighten monetary policy, doing just the opposite of what they did during the previous cycle when they left interest rates too low for too long.
It’s all about the glide path to the Fed’s mandated target of 2% inflation in that should the Fed choose a less patient approach than investors currently anticipate, one should expect some turbulence. Despite the above, at this time, we believe the Fed will talk the talk when it comes to raising interest rates, but not walk the walk. Where they will walk the walk is by continuing to restrict the growth of M2, the supply of money circulating within the economy.
We will reiterate from last week’s Snapshot in that “despite the above, we continue to believe that at this point, after the run-up in the S&P 500 and the NASDAQ Composite off the October 2022 closing lows, we believe that a minor pullback is in order and in fact would be healthy for long-term investors.”
· Prices at the retail level as measured by the Consumer Price Index (CPI) rose a modest 0.1% during May. This along with the fact that the 1.0% increase recorded during May 2022 dropped off the 12-month moving average pushed the year-over-year (y/y) rise in retail inflation down from 4.9% to 4.0%. Y/Y inflation should come down again next month as the CPI for June 2022 increased 1.3%. Even more recent measures of retail inflation has been cooling as the CPI has risen at an annualized pace of 2.4% over the past quarter and 3.2% over the past six months. However, before we strike up the band keep in mind that the core CPI (CPI excluding food and energy) remains elevated, rising 0.4% during each of the past three months which annualizes out at a core inflation rate of 4.8%. In addition, over the past six months the core CPI has risen at an annualized rate of 5.6%. (Source, U.S. Bureau of Labor Statistics)
· Shelter costs, comprising approximately 35% of the CPI, remain elevated, rising 0.4% for each of the past four months and by 8.0% y/y. However, as leases renew, this number should fall considerably. (Source, U.S. Bureau of Labor Statistics)
· News from the FOMC Meeting
- “We have raised our policy interest rate by five percentage points, and we’ve continued to reduce our security holdings at a brisk pace. We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.” (Fed Chair Jerome Powell)
- “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.” (FOMC Policy Statement)
· It’s easy to be “afraid” when doing so (waiting) pays you ~5%. However, over the long haul there is a huge opportunity cost in the forms of slower portfolio appreciation along with renewal risk.
· Ever play sports? The weakest player has always been a concern. They can relatively help or kill a team. The bond market which has perennially been the weakest player has gotten much better as interest rates have moved higher! They are not hurting the team as much anymore.
· We recently read an informative blog from Ben Carlson entitled, “This is Why You Stay the Course.” Amidst other data Carlson referred to a chart posted within an article written by Sam Ro, CFA (“Wall Street’s 2023 Outlook for Stocks”). Ro lists the year-end price targets for the S&P 500 going into 2023 from sixteen of the largest Wall Street Firms. Barclays had the lowest target at 3,675 while Deustche Bank had the highest, 4,500. The S&P 500 closed Friday at 4,409.59. The bottom line is that nobody can accurately predict the direction of the financial markets over the short haul as it is a random one more often than not. However, over the long haul, say five-plus years, stocks rise more than 90% of the time -- which is “Why You Stay the Course.”
· The average individual cannot handle the information overload that is being disseminated. In our opinion that answer is to stay within the asset allocation model that suits your long term objective.
· The financial markets VERY RARELY work in lockstep with the economy which is why that when you add in human behavioral responses, they are difficult if not impossible to predict over the short-term.
· Some investments all in the “too hard pile.” Perhaps this is where PayPal (PYPL) and Boeing (BA) belong. Quite often it pays to wait to reduce some of the ‘direction risk’ prior to investing even if it means getting in at a higher price.
· This is the “old new normal” and we all just have to get used to it. In regard to interest rates, Post Great Recession through the end of 2021 was a historic anomaly and the sooner you realize this and begin to function in this world you’ll be better off.
In fact, except for a brief period post 9/11, the yield on the 10-Year U.S. Treasury Note spent the entirety of the 50-plus year period beginning 1964 and culminating with the Great Recession above 4.00%.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, May Housing Starts; and on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, May Existing Home Sales and the May Index of Leading Economic Indicators from the Conference Board.
· The earnings season has begun to wind down. However, some companies reporting of note, include – FedEx (FDX), La-Z-Boy (LZB), KB Home (KBH), Accenture (ACN), Commercial Metals (CMC), Darden Restaurants (DRI) and CarMax (KMX).
“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.”
