· Stocks remain near the upper end of a fundamentally rich trading range despite all of the major averages pulling back fractionally, with the exception of the tech-heavy NASDAQ Composite which gave up 1.10% despite closing at a record high 17,019.88 Tuesday, its first ever close above 17,000. What weighed on the market was the continuation of the push-pull between inflation, valuation, interest rates, the economy and the Fed. This week concerns were centered around the lackluster bond auction for U.S. Treasuries on Wednesday. However, given the inline inflation data released Friday (see Personal Consumption Expenditures [PCE] below) after a morning selloff, stocks and bonds rallied.
The bottom line, nothing earthshattering occurred this past week which would change our opinion that stocks and bonds both seem reasonably valued. As such, we continue to recommend scaling into secular growers on weakness; nibbling at value stocks, especially those that will benefit from utilizing technology to reduce operational costs and laddering fixed income. We expect the summer to be choppy as volume contracts, the election approaches and the accompanying rhetoric heats up.
· As the economy slows, expect more companies to have trouble posting earnings that impress. A couple of examples this past week include Dell Technologies (DELL). The manufacturer of PC’s and AI-oriented servers fell nearly 18% Friday after the company posted better than expected revenue and earnings growth. However, what concerned investors were the year-on-year flat operating margins, indicating a lack of pricing ability for AI servers, the area of the company which had driven share price appreciation. On the other side of the ledger, shares of Nordstrom (JWN) jumped 5% Friday on better than expected earnings and a positive forward outlook. Extrapolating the above to a macro level, we expect investor interest to continue to be centered around artificial intelligence. However, stocks within that sector are becoming more and more priced for perfection.
· Is the demand for labor slowing? With an Unemployment Rate at 3.9%, investors will look for clues into this question upon the release of the May Non-Farm Payroll Report due out this coming Friday. In addition to expecting unemployment to tick up a bit, the consensus estimate is for payrolls to increase by 180,000, in line with April but down substantially from prior months.
· As the economy slows and the consumer weakens they too will become more discerning in regard to purchases. It is somewhat of a minefield out there so stay diversified. A case in point can be seen by the performance of the Select Sector SPDR Exchange Traded Funds (See Chart Below), which despite the pullback in all of the major averages eight of those eleven sectors were up for the week. You might wonder how this occurred. Well, the reason is that the individual sectors that led the way were more than offset by a 2.34% decline in the Technology Select Sector SPDR (XLK), which makes up more than 30% of the S&P 500.
· Minutes from the 2-day meeting of the Open Market Committee of the Federal Reserve (FOMC) which concluded on May 1 were released a week ago Wednesday. We thought it might be a good idea to repost these as they will most likely be retained as the primary position of the Fed throughout the month of June. Two statements of note within the minutes included 1) “participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2-percent objective” and 2) that “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.”
· According to the U.S. Energy Information Administration, solar and battery storage will make up 81% of new U.S. electric generating capacity in 2024. The EIA further notes that of the 62.8 gigawatts (GW) of capacity expected in 2024, solar will comprise 36.4 GW, up from 18.4 GW in 2023 while 14.3 GW of battery storage will be added. This should take some pressure off our already overused utility grid.
· Wednesday, weak U.S. Treasury auction of $44 billion in 7-year notes pushed interest rates higher and stocks lower. This follows Tuesday's lukewarm demand for $140 billion of two- and five-year notes. These auctions, completed via a confidential, competitive process, in addition to explicit and implicit Fed policy, determine the direction of intermediate and long-term interest rates. The weak demand for the 7-year pushed the interest rate up from 4.56% to 4.63% before settling back to 4.52% on Friday.
· According to the Federal Home Loan Mortgage Corporation (FreddieMac), “Following several weeks of decline, mortgage rates changed course this week. More hawkish commentary about inflation and tepid demand for longer-dated Treasury auctions caused market yields to rise across the board. This reality, as well as economic signals that moved sideways over the last few weeks, have resulted in mortgage drifting higher as markets continue to dial back expectations of interest rate cuts.”
· 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.
· Corporate news – In an effort to ease the pain from inflation that consumers are feeling, Amazon (AMZN) will begin to discount up to 4,000 items from its Amazon Fresh Stores. The move comes on the heels of similar ones by both Target (TGT) and Walmart (WMT). T-Mobile (TMUS) is buying U.S. Cellular’s (USM) wireless operations and a piece of its spectrum for $4.45 billion.
· Upcoming Economic Reports scheduled to be released this week include the following, on Monday, April Construction Spending and the ISM Manufacturing PMI; on Tuesday, April Orders for Durable Goods and April Factory Orders; on Wednesday, the ISM Services PMI; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and April U.S. Trade Balance and on Friday, May Non-Farm Payroll Report, the May Unemployment Rate and April Consumer Credit.
· The Q1 Earnings has begun to slow. However, companies of note scheduled to report this week, include – HealthEquity (HQY), Bath & Body Works (BBWI), Crowdstrike (CRWD), Campbell Soup (CPB), lululemon (LULU), Dollar Tree (DLTR), Five Below (FIVE), Toro (TTC), DocuSign (DOCU), and JM Smucker (SJM).
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.”
