· Stocks were mixed this past week as the tailwind that was created by relatively tame economic data was offset by falling consumer sentiment (see below). Chances are it will take several months to work through what we have defined numerous times as a “fairly valued market.”
When investing, like anything else in life, sometimes you just have to bide your time. However, what is different now versus the decade that ended December 31, 2021 is that holders of cash are being paid more than 4% (see Treasury Yields Below) as compared to nearly nothing a couple of years ago. That said, eventually inflation will erode the purchasing power of those that have committed too large a percentage of their portfolio to cash. If it does not, then renewal risk will. In our opinion we believe that over the intermediate- to long-run, the returns achieved by investors in the stock market will be higher than those invested elsewhere, including bonds and cash.
· We are in an era of kamikaze politics as acting in a divisive, combative manner is the surest way to get elected/reelected. (Yes, both sides of the political aisle.) Solving the most critical issues of the day comes a distant second to the furthering of one’s political career. Gone are the days where the “art of compromise” reigned.
· A meaningful drop in stock prices as a result of the standoff in Washington over the debt ceiling will be a buying opportunity. There is no way that our self-serving politicians will let the financial markets suffer over an extended period of time as that may jeopardize their reelection.
· In the energy patch, rig counts dropped as a result in the recent decline in the price of oil and gasoline. Historically an anomaly, prices appear to have peaked prior to the Memorial Day Holiday. Concerns over the strength of the global economy along with the reluctance of the Biden Administration to replenish the Strategic Petroleum Reserve (SPR) are two main causes for the decline.
· Debate over debt ceiling wreaking havoc on short-end of the yield curve. The 1-month U.S. Treasury Bill has risen from 4.35% at the end of April to 5.79%, this as the 3-month has fallen from 5.14% to 4.87%.
· The crisis of confidence surrounding the regional banks has yet to play out. We predict a bumpy and annoying ride that may linger longer than many expect. Our best estimate is that the worst is over and that banks with duration exposure in line with their deposits are safe as credit quality is not an issue. However, expect onerous new bank regulations that may hinder earnings growth at these banks. In addition, quantifying human behavior is difficult at best.
· Inflation transitory? Consumers don’t think so as according to Joanne Hsu, the director of the University of Michigan’s Survey of Consumers “year-ahead inflation receded slightly to 4.5% in May after spiking to 4.6% in April. After two years of relative stability, long-run inflation expectations rose to their highest reading since 2011, lifting from 3.0% last month to 3.2% this month.”
· Alphabet (GOOGL) surges as the company impresses the street at their I/O Developers Conference this past week as CEO Sundar Pichai delivered a two hour keynote address that at least temporarily eliminated the fear that the company was behind the AI curve.
· 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.
· TJX, Target and Walmart all report earnings this coming week. Perhaps we will see where many of those that shopped at Bed, Bath and Beyond took their business.
· 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%.
· The objective of all media is to pump your anxiety level up to “DEFCON 5.” Don’t fall for it and ask yourself this simple question – “will you be more or less apt to make a substantial mistake in regard to your portfolio should you buy into the ‘end of America/dollar’ or you name it hype?”
“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.”
