- Stocks closed out the month and first quarter on a positive note as all major indices rose more than three percent on hopes that, despite its continued hawkish rhetoric, the Fed is done hiking interest rates. This belief is founded in the estimate the 2023 Gross Domestic Product (GDP) will be cut by 0.50%, due to the curtailment of lending as a result of the failure of Silicon Valley and Signature Banks. In addition, on Friday the Bureau of Economic Analysis reported that core inflation (ex- food and energy) as represented by the Personal Consumption Expenditures (PCE) Price Index rose just 0.30% during February and dropped from 4.7% to 4.6% over the past twelve months. Both of these should provide more than enough reason for the Fed to at least pause at their upcoming two-day meeting May 1-2.
As noted below earnings season kicks off the week of April 10 which will provide investors with a snapshot of the economy as well as a look at how publicly traded companies are coping with higher interest rates along with a tight labor market. Despite the rally thus far in 2023 there will most likely be a continuation of the volatility as the economy transitions to a historically normal interest rate environment.
- The Financial Sector continues to struggle as the potential for more regulation looms and depositors have repositioned assets from traditional checking and savings into higher interest bearing instruments such as money markets and short-duration U.S. Treasuries. The Financial Select Sector SPDR ETF (XLF) and SPDR S&P Regional Bank ETF (KRE) have been relatively weak in comparison to the S&P 500. This past week XLF rose 2.32% as KRE fell 0.09% while the SPDR S&P 500 ETF Trust (SPY) rose 3.25%. Over the trailing month the XLF has fallen 9.25% while the KRE has shed 27.72%, this as the SPY rose 4.11%.
- Congress grills TikTok CEO Shou Chew regarding the influence of the Chinese government on the company which is partially owned by the Chinese technology company, ByteDance. This is a double-edged sword for American social media companies, including Meta Platforms (META), Snapchat (SNAP) and Pinterest (PINS), as on one hand a ban of TikTok may result in more demand for the other companies but also engender further scrutiny and perhaps regulation of their algorithms used in collecting data.
- Growth stocks are back in the driver’s seat as the Fed tightening cycle appears to be coming to an end. After outpacing the Schwab US Large-Cap Growth ETF (SCHG) during 2022, a fund designed to keep pace with the total return of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index, the Schwab US Large-Cap Value ETF (SCHV) has lagged thus far this year. In fact, SCHV has fallen 0.05% during 2023 while SCHG, led by Apple, Microsoft, Amazon, Nvidia, Alphabet and Tesla, has risen 17.46%. During 2022, SCHV dropped by “only” 7.63% while SCHG plunged 31.80%. We believe that the recent outperformance will continue, but not nearly at its current pace.
- Having recently stated that “A.I. stresses me out” and warning about the inherent dangers of the technology, Tesla CEO Elon Musk is calling for a moratorium on its development until “we are confident that their effects will be positive and their risks will be manageable.”
- U.S. Prime Rate, the rate at which the most secure institutions borrow money is currently at 8.00%. As most companies borrow at prime plus at least 1.50%, this brings borrowing costs to nearly 10.00%. This, in conjunction with the stricter lending standards as a result of Quantitative Tightening (declining M2) and the recent turmoil in the banking sector should tighten lending significantly. Of note is the fact that the Prime Rate stood at 3.25% through the three years beginning March, 2020, when the Fed cut by 1.00% from 4.25% at the onset of the pandemic.
- The Fed should currently focus solely on a policy called Quantitative Tightening (QT) or by not replacing maturing Treasuries or mortgage-backed securities, providing a headwind to growth in the money supply and therefore economic growth.
- How broad was the rally this past week? Of the 138 Industry Groups rose, 137 posted gains with only the Health Care Providers falling just 0.02%.
- According to a Vanguard report dated March 6, 2023, “the typical 60% stock/40% bond portfolio declined about 16% in 2022 – a painful period for balanced investors that has raised doubts about the viability of this strategy. But it helps to put this in perspective. ’The past decade has been a strong run for a 60/40 portfolio,’ said Todd Schlanger, a senior investment strategist at Vanguard. ‘If you look at the nine years prior to 2022, a globally diversified portfolio posted a lofty 8.9% annualized return, despite the low interest rate environment.’” As a result, Vanguard updated its Expected 10-Year Median Return on a 60/40 portfolio from 3.83% at the close of calendar year 2021 to 6.09% at the close of 2022.
As a case in point, the Vanguard Balanced Index Fund (VBIAX), which is comprised of approximately 60% equities and 40% bonds and cash has risen 5.59% year-to-date, this after dropping 16.90% in 2022.
- Upcoming Economic Reports scheduled to be released this week include the following, on Monday, February Construction Spending and the Institute for Supply Management (ISM) Manufacturing Sector Report; on Tuesday, February Factory Orders and the Job Openings and Labor Turnover Survey (JOLTS) Report and February Durable Goods; on Wednesday, the February Trade Balance and the ISM Service Sector Report; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, March NonFarm Payrolls, the March Unemployment Rate and February Consumer Credit.
- The week of April 10 begins another earnings season. However, prior to that there are some noteworthy companies reporting. They include Schnitzer Steel (SCHN), Conagra Brands (CAG), Constellation Brands (STZ) and Levi Strauss (LEVI).
“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.”
