· Stocks moved higher to close out the first half of 2023, once again serving a large helping of humble pie to those whose crystal ball wasn’t quite as clear as was hoped. It is human nature to look for answers even if there are none available. The fact is that, on average, the stock market pulls back at least ten percent approximately every 1.50 years. However, if history is any guide, an investor in the S&P 500 has nearly a 90% chance of making money over any five year period. It therefore stands to reason that it is prudent to ignore the short-term volatility, which is unpredictable, choosing to rely on the long-term which has been quite predictable. That said, many confuse volatility with risk. It is a fact that over the short-term, the financial markets can be both volatile as well as risky. However, over the long-term, they are much less so. It is with this in mind, that we choose to focus on the long-term and let the short-term take care of itself.
We have noted over the past month 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.”
· The economy is at the stage of its cycle where the Fed will be moving in smaller increments over longer periods of time. This, working at the periphery, will in turn have less of an impact on the economy..
· Sign us up for the dog days of summer. Although summer can be lazy for many, for the financial markets summer can bring volatility as volume usually declines and those that are patient tend to be on vacation from their portfolios. This summer shouldn’t be much different. Investors should brace themselves for some volatility as earnings season will begin in a week or so, the Fed will remain active and the economy is slowing in response to interest rate hikes over the past year.
· MidCaps and Transports rally on hopes the recent advance may be broadening out. Cross your fingers as the tech heavy NASDAQ Composite which just completed its best first-half of a calendar year in forty years cannot and should not do all of the heavy lifting..
· LargeCaps shine during the first half. Evidence can be found in the performance of the market capitalization weighted SPDR S&P 500 ETF Trust (SPY) which rose 16.86% over this period as compared to the INVESCO S&P 500 Equal Weight ETF (RSP) which has risen 6.90%. We would expect the return of RSP to come back into balance with SPY over the next six to twelve months.
· Bond yields climb as economic data remains firm. All eyes will be on the labor market data being released this coming week with the Job Openings and Labor Turnover Survey (JOLTS) on Wednesday and the June Non-Farm Payroll Data following on Friday. We believe that should both reports indicate a strong labor market, the yield on the 10-year U.S. Treasury Note which currently stands at 3.85% may move above 4.00% which we believe would then merit serious consideration for purchase.
· Apple’s market cap closes above $3 trillion for the first time ever Friday. Numbers this size tend to lose significance so consider this – According to Dimensional’s Matrix Book, Apple’s market cap now exceeds that of every country except the United States and is twice the size of Germany’s entire publicly traded stock market. In fact, Apple lags only the United States, China, Japan, Germany and India in terms of their market capitalization as compared to Gross Domestic Product (GDP).
· 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.
· Upcoming Economic Reports scheduled to be released this week include the following, on Monday, May Construction Spending along with the June Institute for Supply Management’s (ISM) Manufacturing Index; on Wednesday, May Factory Orders and May Job Openings and Labor Turnover Survey (JOLTS); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance as well as the Institute for Supply Management’s (ISM) Service Index; and on Friday, June Non-Farm Payroll Data along with the June Unemployment Rate.
· The earnings season has wound down for Q1 with only a few companies left to report. Two companies reporting of note, include – Levi Strauss (LEVI) and AZZ (AZZ).
“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.”
