In what was considered a toss-up between 0.50% and 0.25%, the Fed cut interest rates by the former, igniting a rally in the equity markets, but resulting in a pause in the bond bull market. Historically, the beginning of an easing cycle bodes well for stocks and we believe that it will be no different this time, that is only after some choppiness leading up to the election. However, when compared to past cycles, forward returns might be a little muted given the equity valuations. We are also watching the movement in intermediate- to longer-dated interest rates as they are driven by supply/demand as well as Fed policy. Post the cut, yields actually ticked up a bit, suggesting that Fed policy is in line with economic activity. We will see.
“It’s The Economy…”
Sales of Existing Homes fell 2.5% to a Seasonally Adjusted Annualized Rate (SAAR) of 3.86 million units during August from 3.96 million during July. Over the past year Sales of Existing Homes have fallen 4.2% from 4.03 million and sit just above their lows of 3.85 million in October 2023. According to the National Association of Realtors (NAR) “total housing inventory registered at the end of August was 1.35 million units, up 0.7% from July and 22.7% from one year ago (1.1 million). Unsold inventory sits at a 4.2-month supply at the current sales pace, up from 4.1 months in July and 3.3 months in August 2023.” Further along, the report noted that “the median existing home price for all housing types in August was $416,700, up 3.1% from one year ago ($404,200).” (Source, National Association of Realtors)
The Conference Board reported that its U.S. Index of Leading Economic Indicators fell 0.2% during August (-5.0% y/y), after slipping 0.6% during July. Over the past six months the LEI has fallen 2.1%. Ten components comprise the Conference Board’s Leading Economic Index, including average weekly manufacturing hours, average weekly initial claims for unemployment insurance (inverted), manufacturers’ new orders for consumer goods and materials, ISM Index of New Orders, manufacturers’ new orders for nondefense capital goods excluding aircraft, building permits for new private housing units, S&P 500 Index of Stock Prices, the Leading Credit Index, interest rate spread (10-year Treasury bonds less federal funds rate) and average consumer expectations for business conditions.
Initial Claims for Unemployment Benefits for the week ended September 14th fell 12,000 to 219,000 from 231,000 the prior week, which was revised 1,000 higher. The four-week rolling average fell 3,500 to 227,500 from 231,000 which was revised up by 250. (Source, U.S. Department of Labor)
Housing Starts jumped 9.6% or by 119,000 to a seasonally adjusted annualized rate (SAAR) of 1,356,000 during August, as compared to 1,237,000 in July (3.9% y/y). Of note is the fact that there must be approximately 100,000 housing starts per year to replace those lost to natural causes, man-induced causes or by the growing U.S. population. During August, Single-family housing starts surged 15.8% or 135,000 to 992,000 from 857 million (5.2% y/y). Meanwhile Multifamily housing starts fell 4.2% to 364,000 in August from 380,000 during July (0.8% y/y). Building Permits, a key barometer of future starts, rose 4.9% or 69,000 to 1,475,000 in August from 1,406,000 (-6.5% y/y). (Source, U.S. Census Bureau)
Retail Sales edged 0.1% higher during August (2.1% y/y), this after rising 1.1% in July. Two key components of this report, Sales at Gasoline Stations fell 1.2% during August (-6.8% y/y) whereas Restaurant and Drinking Place Sales fell 0.1% during August (2.7% y/y) after rising 0.3% in July. (Source, U.S. Census Bureau)
· According to the Federal Home Loan Mortgage Corporation (FreddieMac), “mortgage rates continued declining towards the six percent mark, reviving purchase and refinance demand for many consumers. While mortgage rates do not directly follow moves by the Federal Reserve, this first cut in over four years will have an impact on the housing market. Declining mortgage rates over the last several weeks indicate this cut was mostly baked in, but rates will likely fall further, sparking more housing activity.” Our take –Housing will become more affordable as interest rates decline. However, prices will most likely remain high or even continue to climb from here as it is the lack of inventory that will remain a competing factor – and that will take several quarters, if not years, to solve.
We Found This Interesting
· Constellation Energy (CEG) disclosed plans to restart the once ill-fated Three Mile Island nuclear plans and sell the power generated to Microsoft (MSFT), helping to satisfy those needs Microsoft ramps up the data center buildout to support artificial intelligence (AI). On another note, Microsoft announced that it was planning to repurchase up to $60 billion of their own shares back and raise their dividend by ten percent.
· Nike (NKE) CEO John Donahoe, who took over the reins at the athleisure company is retiring from his position to make room for Elliott Hill who, before retiring in 2020, was responsible for the commercial and marketing operations of Nike. Shares of Nike have been under pressure over shortly after COVID ended as start-ups like On Holding (ONON) and Hoka, whose parent company is Decker Outdoor (DECK) have made inroads into Nike’s core businesses.
· Shares of FedEx (FDX) slumped as the shift away from overnight and less-profitable methods cut into revenue as well as earnings relative to expectations. We will have to see where this settles down prior to making a decision on shares.
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.”