· Nobody likes rain when they are planning a picnic. But candidly, we all know that without rain there is no garden. Who knows if the fractional selloff this past week as well as the one prior is the start of a pause to refresh or just another head-fake as the selloff has been modest at best. Not only did the S&P 500 set close at a record this past Tuesday, all of the large-cap indexes remain within two percent of all-time highs. At this point we are selectively dollar cost averaging in and will become more aggressive should the bull take a breather that lasts more than a week or two.
Presently, we would welcome a market that bides time by moving sideways or perhaps drifts somewhat lower as it would work off the excesses created as a result of the more than 20% move from the October 27, 2023 bottom, allowing bullish sentiment to cool a bit.
· Given the pace of economic activity along with the strength of the stock market, there is a good chance that when the Fed cuts interest rates they will not do so in a linear fashion, but more in a cut and then wait-and-see pattern. Despite the fact that many believe the Fed will cut over several consecutive meetings, we do not consider it a fait accompli nor do we consider it a prerequisite for continued market strength.
· The longer this narrow trade in Artificial Intelligence (AI) continues, the more likely retail investors will end with a portfolio of momentum stocks only to lose their gains once the music stops.
· We believe that we are in the early innings of an industrial super cycle, as a result of on-shoring and near-shoring. Investors can benefit by investing in technology, companies that utilize technologies to increase efficiencies, industrials, materials and infrastructure plays.
· After a lackluster 2023, the Energy Select Sector SPDR ETF (XLE) has risen to the top as compared to the other broad sector ETFs on a year-to-date basis. We believe we are in the first half of a secular move in the energy sector as investors recognize that the conversion to renewables will take much longer than expected, the market broadens out and dividends become more attractive as interest rates at least plateau around these levels.
· There’s a big difference between a top and a consolidation. If it stalls here, we think that the overall market, including technology, will do so as part of a consolidation and not a long-term top. From the performance of the SPDR Select Sector ETFs that looks like exactly what we are getting. We are very content with this.
· Given the post-earnings performance of Adobe Systems (ADBE) and Palo Alto Networks (PANW), among others, we believe that companies within the Artificial Intelligence (AI) arena are facing a “where’s the beef” moment? Investors want some clarity as to at what pace can AI be monetized and the downsides risks of coming up short.
· The Open Market Committee of the Federal Reserve (FOMC), the body that determines monetary policy, will conduct a regularly scheduled two-day meeting, beginning this coming Tuesday, March 19. It would be quite surprising to the vast majority of Fed watchers, including us, if there were any change in current interest rate policy. Additionally, we would expect the FOMC to maintain its “we are getting closer to a cut” rhetoric as well as “we will remain data dependent.” At this time, given the stubborn data surround inflation (see below), we would expect the Fed to stay on hold at least until its June 11-12 meeting.
· According to the Federal Reserve Bank of New York’s Center for Microeconomic Data, “median inflation expectations remained unchanged at 3.0 percent at the one-year horizon, increased to 2.7 percent from 2.4 percent at the three-year ahead horizon, and increased to 2.9 percent from 2.5 percent at the five-year ahead horizon.” The fear of inflation becoming embedded in the minds of consumers and as a result the economy is precisely the reason why the FOMC remains hesitant in regard to cutting interest rates.
· The Fed’s efforts to get inflation back to two percent, one-half of its congressionally mandated objectives (the other being maximum employment), from its current level of around three percent, aka the “last mile” may take more time and effort than the move to here from its highs during 2022 as some inflation data will most likely remain sticky.
· The U.S. House of Representatives passed a bill that calls for Chinese company ByteDance to divest itself of TikTok or risk having it banned in the United States. In order for the bill to become law, the Senate will also have to approve and President Biden sign. A forced sale of TikTok to U.S. investors is also being considered. In response, a spokesperson for the Chinese government stated that “the sale or divestiture of TikTok involves technology export, and administrative licensing procedures must be performed in accordance with Chinese law and regulations.” To us, this response is partially the reason why we believe TikTok should fully divest itself from control by the Chinese government, who, upon demand, has access to their algorithms.
· You earned your stripes during 2022, when the S&P fell more than 25% from its prior record high set January 3, 2022 as you retained the appropriate level of risk in accordance with your objectives, which together we designed. Keep in mind that it won’t always be as easy as it is now. According to the Hartford Funds, “from 1984 to 2023, the S&P 500 Index returned an average of 11.33% per year, and investors may have expected similar 11% returns in any individual year. However, there were only three years in which the Index returned between 9% and 12% during this period. Volatility is much easier to tolerate when you expect it.”
· After a furious rally off the October 2022 lows, interest rates have been trading within a range indicating to us that, at least for now, perhaps the easy money has already been made in the bond market. Those looking to get in on the long end of the yield curve should wait for more data to see if inflation is indeed cooling to the extent to warrant such an investment.
· Corporate news –Southwest Airlines (LUV) cut capacity after being informed by Boeing (BA) that it should expect deliveries of 46 Boeing 737 Max 8 airlines this year, down from 58. Initially, Southwest had expected Boeing to deliver 79 Max planes during 2024. In response to being informed of this, Southwest CEO Bob Jordan said during a conference that “Boeing needs to become a better company.” In a related story, United Airlines (UAL) announced that they were on the brink of securing at least three dozen Airbus A32neo jets, in large part due to the issues surrounding Boeing’s Max 10 planes.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, February Housing Starts and on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and the February Index of Leading Economic Indicators.
· The current earnings cycle has peaked and begun to wind down. Nevertheless, several companies of note are reporting this week, to include – Health Equity (HQY), Chewy (CHWY), General Mills (GIS), KB Home (KBH), Micron (MU), FedEx (FDX) and Nike (NKE).
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.”
