Within our Weekly Report below, we have a section in quotations entitled “’It’s the Economy…’” for a reason as it recalls a quote from Bill Clinton’s Democratic Strategist James Carville during his successful campaign of 1992. As a reminder of what to focus on, Carville stated that “it’s the economy, stupid!” Well, the more things change, the more they stay the same as this past Tuesday’s election results reaffirmed.
Although the United States has issues, we believe that President elect Trump will inherit a modestly growing economy, with historically low unemployment and declining inflation. Furthermore, the stock market which is at record highs averaged 14.44% per year from election day 2020 through election day 2024. One word of caution – given that performance as well as the issues Trump must tackle, namely the deficit, the border and entitlement programs, we would not expect the stock market to equal this mark under his Administration nor would we necessarily blame President Trump just as we don’t give credit entirely for the performance of the past four years to President Biden. That said, God Bless America!
· Historical data suggests a strong close to 2024 as according to MFS, “since 1928, when the S&P 500 has entered November with a year to date (YTD) gain of 20%+, it has averaged a further gain of 5.4% in the final two months of the year.” MFS also sourced Bespoke in noting that “the S&P 500 has averaged a YTD gain of 5.2% through October of Presidential Election years since 1928m but this year’s 21.9% gain (through 10/30) is the strongest in an Election Year since 1936.”
We kind of feel like we’re in a game of musical chairs in that portfolio managers will chase calendar year performance in a momentum driven fashion, until they don’t. We also believe that this pertains to the honeymoon period regarding the incoming Trump Administration.
· What has gone virtually unnoticed is the backup in U.S. Treasury Yields and mortgage rates (see below for mortgage rates) as the interest paid on the benchmark 10-year Note has risen from 3.59% at the close on September 17, one day before the Fed cut rates by 0.50%, to 4.37% as the dust settled Friday. That may not sound like a lot, but for every $100,000 that’s an extra $780 paid out by the Treasury to investors.
· Two days after the election, the Open Market Committee of the Federal Reserve (FOMC) concluded a two-day meeting and decided to cut interest rates by 0.25%. Within its post meeting statement, the FOMC noted that “recent indicators suggest that economic activity continues to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up, but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
The final two-day meeting for the FOMC during calendar year 2024 concludes December 18 and the odds are favorable for another 0.25% cut in interest rates. Currently, we believe that they should forego this action as the economy continues to grow at an acceptable pace.
In our opinion what really made news was the one-word response from Fed Chair Jerome Powell when ask whether or not he would step aside should President Trump ask him to prior to the expiration of his term. “No.” Later on Powell stated that the President does not have the power to fire or demote him as it is “not permitted under the law.”
· Not even Warren Buffett can time the stock market as according to regulatory filings, since September 30, 2023, Warren Buffett’s Berkshire Hathaway has sold 615.6 million of its original 915.6 million shares that it held of Apple. Many can speculate as to the reason(s) such as portfolio pruning, reconstruction, tax planning or simply the desire to raise cash. However, it is interesting to note that since that date, shares of Apple have climbed 33.24%. That said, Apple still accounts for nearly one-quarter of Berkshire’s stock portfolio while their cash position has swelled to $325 billion.
· Faced with burgeoning municipal debt, Friday the Chinese Minister of Finance announced a five-year, $1.4 trillion package as a debt swap of sorts. The move disappointed investors, both domestic and abroad as most anticipated a stimulus package as opposed to a shuffling of yuan. We think the Chinese government took this approach rather than something more aggressive as it awaits to see how the Trump Administration develops. Regardless, we recommend no direct investment in China, but rather, if so desired, through a broad emerging market ETF.
It’s The Economy…”
· The University of Michigan reported that the PRELIMINARY NOVEMBER READING OF CONSUMER SENTIMENT rose to 73.0 from a final October 70.5 and from a preliminary October 68.9. The preliminary November expectations component jumped to 78.5 from a final October 74.1 as well as from a preliminary October 72.9. Lastly, the preliminary November current conditions component slipped to 64.4 from a final October 64.9 but edged higher from a preliminary October 62.7. According to the Survey of Consumers Director, Joanne Hsu, “heading into the election, consumer sentiment improved for the fourth consecutive months.” Further along, Hsu noted that “year-ahead inflation expectations fell slightly from 2.7% last month to 2.6% this month. The current reading is the lowest since December 2020.” (Source, University of Michigan)
· NONFARM PRODUCTIVITY DURING THE THIRD QUARTER rose 2.2% (SAAR) after rising 2.1% during the second quarter and by 2.0% y/y. HOURLY COMPENSATION slowed to 4.2% during Q3 from 4.6% the prior quarter and from 5.5% y/y. Adjusted for inflation, the Real Hourly Compensation rose by 3.0% during Q3 and by 2.8% y/y. As a result, UNIT LABOR COSTS (defined as output per hour of work and can be determined by dividing total labor costs by output) rose 1.9% during Q3 and by 3.4% y/y. (Source, U.S. Bureau of Labor Statistics)
· INITIAL CLAIMS FOR UNEMPLOYMENT BENEFITS for the week ending November 2nd rose 3,000 to 221,000 from 218,000 the prior week, which was revised higher by 2,000. The four-week rolling average fell 9,750 to 227,250 from 237,000, which was revised up by 500. Continuing claims for the week ending October 26th rose 39,000 to 1,892,000 from 1,853,000 the prior week, which was revised lower by 9,000. The continuing claims four-week average rose 8,500 to 1,875,500 from 1,867,000. (Source, U.S. Department of Labor)
· Mortgage Rates according to the Federal Home Loan Mortgage Corporation (FreddieMac), “mortgage rates continued to inch up this week, reaching 6.79 percent. It is clear purchase demand is very sensitive to mortgage rates in the current market environment. As soon as rates began to rise in early October, purchase applications fell and over the last month have declined 10 percent.” (Source, Federal Home Loan Mortgage Corporation)
We reiterate a piece of what we noted last week in that “some unanticipated data comes to the fore, mortgage rates should remain at or above these levels pending either a confirmation or repudiation of the unanticipated strength in the labor market, a process that will most likely take us though the balance of 2024.”
Upcoming Economic Reports scheduled to be released this week include the following: on Wednesday, October Consumer Price Index (CPI); on Thursday, October Producer Price Index (PPI) and the Weekly Report of Initial Claims for Unemployment; and, on Friday, October Retail Sales, October Industrial Production, October Capacity Utilization and September Business Inventories.
The Current Quarterly Earnings Season has begun to wind down. However, several companies of note are scheduled to report, including the following – The Home Depot (HD), Tyson Foods (TSN), Beazer Homes (BZH), Cisco Systems (CSCO), Advance Auto Parts (AAP), Applied Materials (AMAT) and Walt Disney (DIS).
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.”
