· If you were going to take a vacation, in hindsight last week would’ve have been the perfect time as other than the Personal Consumption Expenditures Index (PCE) on Friday which showed inflation continued to ebb, there was scant economic data and the markets acting accordingly as they barely budged. As just mentioned the PCE, one of the Fed’s favorite inflation indicators, rose only 0.1% during May and is up 2.6% over the past year. Furthermore, the PCE has dropped from a high of 7.1% in June 2022. As we have noted within past Snapshots the Fed may have difficulty pushing inflation down to its 2% target from here as despite the fact that wage inflation has slowed, there is still upward pressure. In addition, according to Barron’s, “global shipping is at least five times as expensive as it was in 2023.” The financial publication cites Houthi attacks on container ships in the Red Sea which have resulted in companies changing routes from this area to around Africa which adds tremendous costs as well as time.
· As we close out the first half of 2024 (can you believe how time flew? What was notable to us was the continued outperformance of technology and communication services, the double digit returns of the S&P 500 (14.48%) as compared to the Dow Jones Industrial Average (3.79%) or mid-cap Russell 2000(1.02%) and the lack of any real volatility. We would certainly expect volatility to pick up as the election approaches. Nonetheless the underpinnings of the stock market remain healthy and at this time there is no indication of any meaningful downturn. That said, keep in mind that ten percent pullbacks are common and indeed healthy. According to data from Dow Jones, since 1958 there have been 58 pullbacks of ten percent or more.
As we have repeatedly noted, time will tell, but for now it is not wise to step in front of this bullish freight train. 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.
· Few could argue (what, Americans argue over politics?) that if it were a boxing match, the Thursday night debate between former President Trump and our current President Biden would’ve been a knockout in favor of Trump. Biden should’ve cried “no mas” a la Roberto Duran in his fight against Sugar Ray Leonard on November 25, 1980. Next to the other podium President Trump stood, bobbing and weaving, dodging President Biden’s mostly ill-timed jabs and as Trump was being Trump was able to dodge historical facts as well. Regardless of your political affiliation the result of the debate pushed the potential for a Trump Presidency in the betting markets much higher Friday, along with intermediate and long-term interest rates as ironically investors perceive a second Trump Presidency as more inflationary than a second Biden term. In our opinion it could be promised tax cuts, aggressive spending, a potential change at the Fed or a combination of all three. Time will tell if the post-debate gains made by former President Trump hold as President Biden may regain his footing, voluntarily drop out of the race or as some Democrats have stated, be replaced before or at the Democratic National Convention in August. At this time, a second debate, scheduled for September is unlikely as Trump has nothing to gain from providing Biden a chance at redeeming himself. Forget the boxing. Maybe they’ll just play golf together. We wonder who truly is the better golfer? (JK)
· Best wishes for an enjoyable July fourth. We’re saddened by the focus on what divides us as opposed to what binds all Americans together. If it continues, the media wins and we all lose. To what extent who knows. Time will tell. Take care.
· Excess Savings that Americans Accumulated during the Pandemic have run dry, this according to data from the Bureau of Economic Analysis. At its peak during August 2021, that number totaled $2.1 trillion. However, as the reopening of the economy ramped up, Americans used up all of that excess and then some causing some to believe the economy will hit somewhat of a wall over the next quarter or two. We wouldn’t call it a wall but we do think some significant slowing is at hand.
· Bubbles act like a vortex – slowly but surely they suck you in so that in the end you have an undiversified portfolio. Then the bubble bursts and it spits you out. Sometime diversification can be difficult as it inherently implies laggards.
· 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. At this time, we believe the financial market will do just fine in a “higher for longer” environment.
· The price to purchase an existing home hit all-time highs in May. According to the National Association of Realtors, “the median existing-home price for all housing types in May was $419,300, the highest price ever recorded and an increase of 5.8% from one year ago ($396,500). All four U.S. regions registered price gains.” According to NAR Chief Economist Lawrence Yun, “home prices reaching new highs are creating a wider divided between those owning properties and those who wish to be first-time buyers. The mortgage payment for a typical home today is more than double that of homes purchased before 2020. Still, first-time buyers in the market understand the long-term benefits of owning.”
· “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 Federal Home Loan Mortgage Corporation (FreddieMac), “the 30-year fixed-rate mortgage continues to trend down, hitting the lowest level in almost three months. By historical standards, the economy is in good shape, and we expect rates to continue to come down over the summer months, bringing additional homebuyers back into the market.”
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 – Shares of Nike (NKE) slumped on Friday after the company warned investors to expect a 10% drop in sales for the current quarter, far worse than the low single digits analysts had forecast. Current CEO John Donahoe is coming under fire as a result. A bankruptcy judge approved Rite Aid’s (RADCQ) restructuring plan which will reduce its debt by $2 billion but turnover control of the company to its lenders. The retail pharmacy / convenient store industry has come under severe margin pressures as its “front end” is competing with the likes of Amazon. Another case in point would be the shares of Walgreen Boots (WBA) which also fell on weak earnings and future guidance.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, the May Job Openings and Labor Turnover Survey (JOLTS); on Wednesday, May U.S. Trade Balance and May Factory Orders; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and Friday, the June Non-Farm Payroll Report to include the June Unemployment Rate.
· The Q1 Earnings has slowed to a trickle. However, companies of note scheduled to report this week, include – Constellation Brands (STZ) and Radius Recycling (RDUS).
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.”
