Tuesday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 7

Good morning.  Hope that you stayed warm (it was really, really, really cold out here in Omaha!) and enjoyed the long weekend. 

New Highs in the Market

The stock market extended to new highs again last week.  More good news due to sharply improving Covid data, stimulus talks and more great corporate earnings reports.

Regarding COVID, it was reported there have now been 159 million vaccinations worldwide, including 48 million in the US that have been given, with the US averaging 1.62 million doses per day. According to First Trust, roughly 40% of the US population currently has antibodies. First Trust believes that we are currently over halfway to the 70% goal (herd immunity), and projecting vaccinations forward shows we are likely to get the rest of the way there in mid-late April as vaccines continue to do the heavy lifting.  

Corporate earnings season continues to impress, with about 80% of companies beating both top line (revenues) and bottom line (earnings) estimates (the long-term average “beat rate” is usually closer to 67%)*. 

Many companies are also offering positive guidance regarding future prospects.   In fact, with such strong beat rates and guidance, the percentage of stocks reporting earnings triple plays (beat EPS, beat sales, raise guidance) spiked in recent quarters and remains elevated at record levels this quarter (going back 20 years’ worth of data, anyway). 

With more than 75% of companies reporting, earnings growth is expected to be 3.4%. This is a significant increase compared to the -10.3% originally estimated on January 1 for Q4 earnings**. 

More Good News (Especially for Small Caps)

The S&P gained over 1% last week and new all-time highs were again seen in a variety of indices.  Small cap stocks strongly outperformed again. In fact, according to BeSpoke Investments, small caps have now already recovered all of their pronounced underperformance versus large caps from 2018 to early 2020.  Small caps are on fire!

The U.S. stock market is up 17% since the election over 3 months ago now.  Did you know, however, that virtually every major non-U.S. stock market is up even higher? Emerging markets in the aggregate are up nearly 30%, led by gains in Brazil and China. (Side note: For more on “why international”, a hat tip to Senior Client Portfolio Manager extraordinaire Case Eichenberger for finding this new advisor-friendly research from Vanguard)

Also, since the election, the two U.S. sectors up the most are Energy (+53%) and Financials (+28%).  Conventional thinking was that these two sectors would underperform with the new administration. They might very well still do so, but they are getting off to a nice headstart first.  

Key economic reports this week include January Housing Starts, Retail Sales and Existing Home Sales. Personally, I’m most interested in the inflation data Wednesday (PPI).

Last week I mentioned how the 1-year relative performance numbers will start to change rather dramatically. This might create money to move by some momentum investors. It might also change some of the market narratives and questions investors are asking.  

Related to that last point is upcoming inflation data.  While actual year-over-year inflation is still low by historical standards, we will be soon dropping off some negative numbers over the next 4 months.  Official headline inflation numbers could very well jump to some of their highest numbers in many years.  That might also change some narratives and prompt some questions.   

Listen, Read, Watch

Changing gears to a great podcast: Check out Daniel Crosby being interviewed on “Animal Spirits”. I promise you’ll find valuable nuggets of information you will remember and use, both personally and professionally.  

Speaking of more goodies from Orion’s Chief Behavioral Officer at Orion, did you check out Crosby’s 30-Day Leadership Challenge yet? It’s not too late to start a second round of New Year’s resolutions!

Another article loaded with goodies is the latest from Scott Galloway (a fave of many at Orion), Algebra of Wealth. Galloway can be a strong cup of coffee, with plenty of thought-provoking comments on the economy, technology, the markets, and life in general. 

For another podcast, though a bit longer, that is both sobering and encouraging, try Jeremy Grantham on Meb Faber.  Grantham, who is known for provocative outlooks and views (and is usually right, though sometimes it takes a few years to get there) is interesting as always.  One tidbit from Meb, though. Did you know that once the largest one-year difference in performance in growth stock besting value stocks was 1999? In turn, the biggest one-year difference for value beating growth was the very next year in 2000?  Well, last year in 2020, growth outperformed value by even more than it did in 1999. Hmmm.

College basketball rankings now has three of the top six teams from the powerhouse Big 10. Being in Omaha though, it was notable that Creighton smashed Villanova over the weekend, making a case for being the best in the Big East!

Have a great week!  For more insights and commentary, visit our Financial Advisor Success Hub.

 

0529-OPS-02/16/2021

*https://media.bespokepremium.com/uploads/2021/02/The-Bespoke-Report-021221-5hy7.pdf

**Strategas Daily Macro Brief, 4Q Earnings Season Update, 2/16/2021

The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org.

The CMT Program demonstrates mastery of a core body of knowledge of investment risk in portfolio management. The Chartered Market Technician® (CMT) designation marks the highest education within the discipline and is the preeminent designation for practitioners of technical analysis worldwide. To learn more about the CMT, visit https://cmtassociation.org/.

About Rusty Vanneman
Rusty Vanneman, CFA, CMT, serves as Chief Investment Strategist of Orion Portfolio Solutions. He has been with Orion since 2012, previously serving as President and Chief Investment Officer of CLS Investments. Prior to joining the Orion organization, Mr. Vanneman served as Chief Investment Officer and Managing Director for an RIA in the greater Boston area. His 11-year tenure at the RIA included a five-year span during which the firm was owned by E*TRADE Financial, where he also served as Senior Market Strategist for E*TRADE Capital. He also served as a Senior Analyst at Fidelity Management and Research in Boston. Mr. Vanneman received a Bachelor of Science degree in Management from Babson College, where he graduated with high distinction. He is a CFA charterholder and member of the CFA Institute. He also holds the Chartered Market Technician® (CMT) designation and is a member of the CMT Association.