· The large-cap broader indexes rose fractionally this past week while the cyclically centered Dow Jones Industrial Average, MidCap Russell 2000, interest rate sensitive Utility Average and Transports all underwent minor pullbacks. Interest rates also drifted upward. Nonetheless, all of the above have been held hostage by the discussions between the Biden Administration, Democrats and Republicans regarding the lifting the debt ceiling from its current level of $31.6 trillion. Investors may get a chance to see what life is like after the negotiations have ended and the debt ceiling lifted as it is being reported this Sunday morning that a tentative agreement has been reached (see below).
We believe that a “buy the rumor, sell the news” scenario may play out and that perhaps a minor pullback is in order especially given the run-up in technology stocks as a result of the enthusiasm over the long-term business benefits of Artificial Intelligence (AI). In fact, we noted within last week’s Snapshot that “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.” Furthermore, we would not consider such a pullback actionable on the sell-side.
· Quotes from the debt ceiling negotiations:
o President Biden
- The deal is “an important step forward that reduces spending while protecting critical programs for working people and growing the economy for everyone.”
- “The agreement protects my and Congressional Democrats’ key priorities and legislative accomplishments.”
- Regarding the deal, it “represents a compromise, which means not everyone gets what they want.”
o Republican House Speaker Kevin McCarthy
- “We have come to an agreement in principle. We still have a lot of work to do, but I believe this is an agreement in principle that’s worthy of the American people.”
- “I expect to finish the writing of the bill, checking with the White House and speaking to the president again tomorrow afternoon. Then posting the text of it tomorrow and then be voting on it on Wednesday.”
· 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.
· Fears of debt default have pushed the yield on the 1-month T-Bill above 6.00% to 6.02%. We recommend keeping some cash in money markets as when the debt limits are raised (and they will be), the Treasury will have to issue new debt pushing supply into the market thereby driving prices down and yields up.
· Nvidia (NVDA), the designer of the computer chip central to Artificial Intelligence (AI) posted quarterly earnings of $1.09/share, far surpassing the consensus estimate of $0.92/share. As importantly, the company issued second quarter revenue guidance of $11 billion, far surpassing estimate of $7.15 billion. In so doing, Nvidia cemented itself as the company at the front of AI and also confirmed that AI is blossoming into a powerful economic tool. As a result, shares of Nvidia surged on Thursday adding 150% of Intel’s (INTC) entire market capitalization in a single day.
· Despite the fact that the S&P 500 has risen 9.53% year-to-date, an equal number of sectors are up as well as down indicating a large-cap driving market. Thus far this year the Russell 200 has risen just 0.67%.
· Given the resilience of the economy, especially the service sector as well as the persistently high inflation, at this time we believe the Fed views 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.
· 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 4.13%. 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%.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, May Consumer Confidence; on Wednesday, the April Job Openings and Labor Turnover Survey (JOLTS); on Thursday, April Construction Spending and the Weekly Report of Initial Claims for Unemployment Insurance; on Friday, the May Non-Farm Payroll Report to Include the May Unemployment Rate.
· The earnings season has begun to wind down. However, some companies reporting of note, include – Hewlett Packard Enterprise (HPE), Okta (OKTA), Chewy (CHWY), CrowdStrike Holdings (CRWD), Salesforce (CRM), Dollar General (DG), Zscaler (ZS), Broadcom (AVGO), MongoDB (MDB) and Cooper (COO).
“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.”
