Perhaps this was the calm before the “earnings storm” as investors repositioned themselves along a bullish bias with the Dow Jones Industrial Average, S&P 500 and Total Market Index all closing at record highs pushed along by inline inflation data (see below). As we move into the heart of earnings season, we would expect volatility to pick up. However, if to the downside, all things being equal, we would consider it short-term noise and not the start of anything major.
· Yesterday marked the two-year anniversary of the bottom of the bear market (October 12, 2022). Two years ago, inflation at both the Wholesale and Retail levels stood above eight percent on a year-over-year basis. Ironically, the 10-year U.S. Treasury Note was yielding just about 4%, within 0.10% of its current value. At that time, the Fed had incrementally raised the Funds Rate from zero percent at the onset of the pandemic to around three percent on its way to a high of 5.25% before recently cutting rates by 0.50% a month ago. Since then, inflation has come down to just over two percent, mortgage rates have most likely peaked for this economic cycle and the Fed has embarked on a path of easing, the pace of which is yet unknown. On the flip side, inflation remains sticky, housing prices remain high, and in our opinion, we are a divided nation. Nonetheless, over the past two years, the S&P 500 has risen more than sixty percent, once again proving the point that the time to buy is when things look the bleakest.
Where do we go from here? If history is any guide, the bull still has room to run over the next eighteen months. However, these gains should most definitely moderate while periodic volatility crops up.
· The Social Security Administration announced that the more than seventy-two million Americans that benefit from payments will see a 2.5% increase, or about $50/month in 2025. This inflation-adjusted increase comes on the heels of 3.2%, 8.7%, 5.9% and 1.3% for 2024, 2023, 2022 and 2021, respectively. Keep in mind that these increases are in line with inflation over that same period. (Source; Social Security Administration)
· The first bank out of the gates with earnings this quarter was the nation’s largest, JP Morgan Chase (JPM), reporting earnings of $4.37 per share as compared to estimates of $4.01 on revenue of $43.32 billion versus estimates of $41.63 billion. Earnings were helped higher than expected net interest income along with gains on investments. (Source; JP Morgan Chase)
“It’s The Economy…”
Prices at the wholesale level as measured by the Producer Price Index remained unchanged during September, after rising 0.2% during August. Over the past year the PPI has risen 1.8%, up from 1.7% y/y last month, but down from a peak rate of 11.7% during March 2023. Energy prices fell 2.7% during September (-13.8% y/y) after falling 1.0% during August. Food prices rose 1.0% during September after rising 0.2% in August (3.2% y/y). Excluding food and energy, the Core PPI rose 0.2% during September (2.8% y/y), after rising 0.3% in August. (Source, U.S. Bureau of Labor Statistics)
Not a bad number, although wholesale cost increases were aided by the substantial decline in energy. Additionally, we will need to watch if retail costs (see CPI) continue to increase faster than wholesale costs (PPI). That may result in a squeezing of profit margins.
Prices at the retail level as measured by the Consumer Price Index rose 0.2% during September (2.4% y/y), after rising 0.2% during August as well as July. The CPI has fallen from a y/y high of 9.1% during June 2022 and from 2.5% y/y one month ago. Energy prices fell 1.9% during September (-6.8% y/y) after easing 0.8% during August. Food and Beverage prices rose 0.4% during September (2.3% y/y) after rising 0.1% during August. The cost of shelter rose 0.2% during September (4.9% y/y) after rising 0.5% in August. Excluding food and energy, the Core CPI rose 0.3% during September, after rising 0.3% during August. Over the past year the core CPI has risen 3.3% y/y, well below the peak of 7.6% in February 2022 but up from 3.2% y/y one month prior. (Source, U.S. Bureau of Labor Statistics)
Despite the improvement in the rise in the cost of shelter, inflation remains a bit sticky at the retail level. The Fed will have its work cut out for it getting the CPI down to its 2% target and still attain a soft economic landing. It’s all about the glide path.
Initial Claims for Unemployment Benefits for the week ending October 5th rose 33,000 to 258,000 from 225,000 the prior week, which went unrevised. This represents the highest level for Initial Claims since August 5, 2023. The four-week rolling average jumped 6,750 to 231,000 from 224,250, which was also unrevised. (Source, U.S. Department of Labor)
We are not alarmed by the increase in claims for unemployment benefits given the impact from Hurricane Helene.
· According to the Federal Home Loan Mortgage Corporation (FreddieMac), “following the release of a stronger-than-expected September jobs report, the 30-year fixed rate mortgage saw the largest one-week increase since April. However, the rise in rates is largely due to shifts in expectations and not the underlying economy, which has been strong for most of the year. Although higher rates make affordability more challenging, it shows the economic strength that should continue to support the recovery of the housing market.”
We reiterate what we noted last week in that “the better than-expected jobs number really put a crimp in the continuation of the decline in interest rates. Unless 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, September Import and Export Price Indexes; on Thursday, the Weekly Report of Initial Claims for Unemployment, September Retail Sales, August Business Inventories, and September Industrial Production and Capacity Utilization; and, on Friday, September Housing Starts.
The Current Earnings Season is now in full swing. The following is a partial list of reports that may impact market sentiment, – United Health (UNH), Johnson & Johnson (JNJ), LVMH (LVMUY), Bank of America (BAC), Goldman Sachs (GS), Citigroup (C), Charles Schwab (SCHW), Morgan Stanley (MS), Abbott Laboratories (ABT), Netflix (NFLX), Intuitive Surgical (ISRG), Elevance Health (ELV), Blackstone (BX), Taiwan Semiconductor (TSM), American Express (AXP), and Procter & Gamble (PG).
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.”
