· You will hear quite a bit of chatter that given the fact the S&P 500 has appreciated more than twenty percent (+20.18%) from October 12, 2022 we have entered a new bull market. Time will be the ultimate arbiter as to whether we have indeed embarked on a new bull run (if we have it is one of the weakest starts) or are experiencing one of the longest bear market rallies in history.
To us, it really doesn’t matter as at Fagan Associates we recognize that both bull and bear markets are part of the process – you can’t have one without the other. A case in point can be illustrated by looking at performance over the last five years, a period during which there have been three sizable corrections in the S&P 500, the first related to failed rate hikes by newly appointed Fed Chair Jerome Powell that lasted from September 20, 2018 – December 24, 2018 during which the index tumbled 19.78%; the second, near the onset of the pandemic, February 19, 2020 – March 23, 2020 which pushed the S&P 500 down 33.92%; and, the third, sparked by interest rate hikes from the Fed in an effort to combat inflation, that as of now ran from January 3, 2022 – October 12, 2022, during which the S&P 500 shed 25.43%.
Despite the three trying times outlined above, over the last five years, excluding dividends, the S&P 500 has risen by an average of 9.11%. Not too shabby! Despite these figures, many believe it’s different this time. We disagree and suggest it ill advised to bet against America and the American Economy.
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.
· There will definitely be headlines made this coming week as on Tuesday the Bureau of Labor Statistics will release the Consumer Price Index, a measure of inflation at the retail level. They will follow this up with the release of the Producer Price Index, a measure of inflation at the wholesale level, Wednesday morning at 8:30a. This will set the stage for the 2:00p announcement by the Federal Reserve as to the direction of interest rates at the conclusion of their regularly scheduled two-day meeting.
· Bullish Investor Sentiment rose to 44.5% of respondents (see below), up from 29.1% the prior week and in doing so marked its highest level since November 11, 2021, this according to the American Association of Individual Investors. Regular readers of our Update, Snapshot or listeners to our Radio Show know that we have frequently cited low bullish sentiment as a contrarian positive indicator which, along with other data, is precisely the reason why we expect a pause in the market’s recent advance, to refresh.
· According to Haver Analytics, “the wholesale inventory-to-sales (I/S) ratio eased to 1.40 in April from 1.41 in March. It remained near the highest ratio since June 2020. The I/S ratio in the durable goods sector rose to 1.85 and compared to a low of 1.47 in June 2021. The I/S ratio for nondurable goods eased to 1.01 from 1.03 which was the highest since November 2020.” The I/S ratio measures the length of time it would take to deplete current inventory without restocking. (Source, Haver Analytics, Central Statistics Office)
· Of the eleven Select Sector SPDR ETFs, Consumer Staples has been the laggard for three consecutive weeks, this according to Select Sector SPDR. Historically, a safe haven, in our opinion the fact that investors are leaving for more economically sensitive sectors is more reflective of valuation rather than anything else.
· Amazon is reportedly exploring the offering of free mobile services to its Prime customers. This would be a blow to Verizon, AT&T and T-Mobile.
· Baker Hughes Rig Count drops by 1 to 695, its lowest level since April 2022. This will most likely put a floor under oil prices and the stock price of energy companies. (Source, Baker Hughes)
· Given the resilience of the economy, especially the service sector as well as the persistently high inflation, at this time we believe the Fed may view their upcoming June meeting as a “skip” rather than a “pause.” In the future, they truly will be data dependent. Time will tell.
· 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.
· 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.
· Does the potential of AI make tech a buy on any substantive weakness? Despite the valuation noted above, we believe it does as the applications of Artificial Intelligence will cut across a multitude of industries.
· 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 Consumer Price Index; on Wednesday, May Producer Price Index; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, May Retail Sales, April Business Inventories, May Industrial Production and Capacity Utilization; and on Friday, the University of Michigan releases its June Report on Consumer Sentiment.
· The earnings season has begun to wind down. However, some companies reporting of note, include – Oracle (ORCL), Lennar (LEN), Jabil (JBL), Adobe (ADBE) and Kroger (KR).
“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.”
