- Stocks rose this past week as the political powers that be appeared to be making headway on raising the debt ceiling. The S&P 500 is currently at the upper end of their trading range (3750-4200), closing Friday at 4,191.98. With this in mind, we would expect some profit taking, even if the debt ceiling is lifted. However, as noted below, we are positive on the stock market over the intermediate- to long-term.
- 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.
- Apple’s market capitalization at $2.76 trillion now exceeds that of the entire Russell 2000, this according to Barron’s and from providers that assemble such data. Barron’s also noted that “today’s five biggest stocks – Apple, Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN) and Nvidia (NVDA) – have a combined market cap of about $8.7 trillion, almost 25% of the S&P 500 cap and about 3.2 times the $2.7 trillion Russell cap.” Barron’s adds that “the top five stocks are also expensive. They trade for an average of 31 times estimated 2024 earnings, while the index trades at 17.4 times earnings.”
- Active drilling rigs within the United States slips to 720, down 7.57% from the close of calendar year 2022 and down from nearly 1,100 during November 2018. Rig counts bottomed at 404 during May 2016. The recent decline in the number of rigs is most likely a combination of the potential for an economic slowdown, tighter federal regulation and fiscal discipline. In total, it will most likely push energy prices higher over the intermediate term as well as the share prices of publicly traded companies engaged in that industry. We also believe that the Energy Select Sector SPDR ETF (XLE) is attractive at these levels.
- Investors remain quite skeptical in regard to the stock market. Is this the proverbial “wall of worry” or will the bears be right? We have noted quite frequently 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.” However, we also believe that equities are fairly valued and trading within a range, unless proven otherwise.
- Corporate profit margins remain firm at around 11% indicating many companies are maintaining pricing power. Should this continue, there is a floor under the stock market. It may also result in stickier inflation and a more hawkish Fed.
- 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.
- Even if moderate inflation is here to stay, the fundamental valuation of utility companies may make them subpar investments for future appreciation. We also believe that the Energy Select Sector SPDR ETF (XLE) is more attractively valued and sports a dividend of 4.16% as compared to the Utilities Select Sector SPDR ETF (XLU) at 3.14%.
- Interest rates rise all along the yield curve as the interest rate on 20-year U.S. Treasury Note now stands at 4.07%. For those individuals considering long-term distributions and use a 4.00% rate, this is attractive.
- 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.
- 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.
- 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%.
- 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?”
- Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, April New Home Sales; on Thursday, the Second Estimate of Q-1 Gross Domestic Product (GDP) and the Weekly Report of Initial Claims for Unemployment Insurance; on Friday, April Orders for Durable Goods, April Personal Income and Spending, and April Wholesale Inventories.
- The earnings season has begun to wind down. However, a number of potentially market-moving companies are scheduled to report, to include – Intuit (INTU), Lowe’s (LOW), Palo Alto Networks (PANW), Autozone (AZO), Snowflake (SNOW), Nvidia (NVDA), Costco (COST), Medtronic (MDT), Netease (NTES), Workday (WDAY), Audodesk (ADSK) and Marvell Technology (MRVL).
“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.”