Weekly Market Bullets with Rusty Vanneman, CFA, CMT, Vol. 92

What a week last week. Despite a mid-term election and crushing news in the crypto space, we experienced the stock market’s best week since June, and last Thursday was the best day in the stock market since 2020. Inflation data that may have signaled an inflationary peak was the catalyst, but other positives included being on the other side of the mid-term elections. Sentiment and seasonals are also still positives. In short, the light is still green for more gains into year-end.

Notable items on this week’s schedule include earnings from Wal-Mart, Home Depot, and Target. And the World Cup starts next weekend!

Other nice talking points from last week…

• Equity markets surged higher in the best one-day reaction to an inflation print in around 20 years (CNBC, Nov. 2022).
• The S&P 500 gained nearly 6% last Thursday, which was its 15th best day since 1953 when the five-day trading week began (CNBC, Nov. 2022).
• The Nasdaq 100 gained 7.49% for its 20th best day in its history (CNBC, Nov. 2022).
• This marks the 4th highest weekly return for 2022 (CNBC, Nov. 2022).

At this point, it’s been a great month and quarter for the stock market. Some notable numbers on the quarter-to-date returns:

• The S&P is up nearly 12% for the quarter (Morningstar, Nov. 2022).
• Multiple sectors in the US are up 20% or more: Energy, Materials, Financials, and Industrials (Morningstar, Nov. 2022).
• Even multiple countries in Europe are up over 20% (Morningstar, Nov. 2022).
• Bonds are slightly higher, but it’s nice to see high yield up 3% (Morningstar, Nov. 2022). That’s a plus for stocks.
• Commodities are still gaining ground too; up over 5% with oil up over 10% for the quarter (Morningstar, Nov. 2022).

The election may not be completely over yet, but how important is the election for the stock market anyway? Not as much as you might think. Here’s some research from Jeff DeMaso at the Independent Vanguard Advisor from November 9, 2022: “According to financial data provider FactSet, executives at just 18 (4%) of the 401 companies in the S&P 500 which reported third quarter earnings between September 15 and November 3 mentioned the word “election.” As divisive and noisy as this election season has been, the data is on par with past mid-term election cycles.”

The interest rate markets continue to be a major driver of stock market performance, flows, and economic activity:

• Last week Ten-year Treasury yields finished at 3.81% (down 35 basis points over the last week); the highest yield last week was 4.22% and the low was 3.81%, where the week closed (Yahoo! Finance, Nov. 2022).
• The yield to maturity on the Bloomberg Aggregate Bond Index came down last week to 4.79%, as of November 10, 2022 (down 31 basis points) (Bloomberg, Nov. 2022).
• The average money market yield rose again last week, finishing at 3.45% as of November 13, 2022 (Crane Data, Nov. 2022).
• The average 30-year fixed mortgage rate rose another basis point last week to 7.24% (Bankrate, Nov. 2022).

Deeper Dive

Gold is waking up. According to Strategas’ Chris Verrone on November 9, 2022: “The yellow metal is waking up to something… what exactly? well, we’re unsure at this point (weaker $, sticky inflation, recession, no recession, central bank pivot, Bitcoin’s demise – take your pick)… but as is often the case in this business, the fundamental or macro justification for a sharp adjustment in price will likely reveal itself in time.  The trend is hardly great, but the combination of a momentum spark and a bearish sentiment backdrop is enough to entertain the contrarian outcome here.  It may take a few swings, but we’ve been warming to long Gold, and continue to do so today.”

For your listening pleasure about gold, check out Orion’s The Weighing Machine podcast with SSGA’s Max Gold from August 30, 2022: “A Gold-Based Investment Strategy”.

As for the dollar getting weaker, check out the chart titled “U.S. Dollar Weakens to Mid-September Levels” found in MarketDesk’s LinkedIn post on November 11, 2022.

A valuable resource at Orion Portfolio Solutions (OPS) provided some potentially easy “why diversify” talking points in the OPS Monthly Chart Pack from October 2022:

• The Materials sector has essentially traded at the same valuations as the over-all market since the beginning of the century. They are currently at a 30% discount.
• Financials have traded at an average 20% discount but are now near a 40% discount.
• Energy also on average a 20% discount, but now at a 50% discount.
• Health care averages a 40% premium, but now is only 10% premium.
• Mega and large caps remain expensive, but small caps are at a 50% discount. That compares to average 20% discount.
• Globally, value typically trades at 30% discount. Despite outperformance this year, it’s still at a 50% discount.
• Everybody loves “Quality” and it shows in an average whopping premium of 65%. Now it’s nearly a 100% premium. Great companies; not so good prices yet.
• The US has traded at a 30-35% premium to non-US stocks. They are now at an 80% premium.

ETF Flows remain on fire. The Financial Times published an article on November 7, 2022 about how “ETF Investors Turned Bullish” in October. According to BlackRock, a net of $115 billion globally went into ETFs last month, triple September’s, and the highest monthly inflows since March 2022 (Financial Times, Nov. 2022).

Here’s another reason for more ETF flows. Do you own mutual funds in your taxable investment accounts or know anybody who does? With distribution season coming up, expect some big cap gain distributions from mutual funds. Due to heavy redemptions of mutual funds, mutual fund managers had to sell shares and realize gains in many cases, which in turn they now have to distribute to shareholders – even if the fund was down big this year (CNBC, Nov. 2022). Ouch. Swapping into another strategy (ETF? Custom Indexing?) may make sense for many taxable investors before the distributions start showing up in the weeks ahead. Either way, this is one more reason a lot more money is going to flow from mutual funds into ETFs in the year(s) ahead. Read more in this CNBC article from November 7, 2022: “Despite stock market losses, investors may get year-end mutual fund payouts. That can trigger a surprise tax bill.”

Strategas on ETF flows via its “YTD Sector ETF Flows v. Relative Perfomance” chart (Nov. 2022): Investors haven’t given up on tech yet. And low flows in energy – and the strong outflows in financials. I’m also surprised at the outflows in Materials.

Want to buy ETFs? Here are ETF Trading Tips from a November 4, 2022 article in the Wall Street Journal:

• Don’t buy the open.
• Use limit orders (not market orders)

WisdomTree, Bloomberg data as of September 30, 2022 on commodities – they can do well even in inflation. It’s all about supply and demand, and commodities are in low supply.

More from WisdomTree on commodities: “In the U.S., the Inflation Reduction Act and the Infrastructure Bill are both strong tailwinds for commodity demand. In Europe, the sharp focus on weaning off Russian energy dependency is adding new urgency to the energy transition, and we expect to see accelerated energy infrastructure plans take place. Conclusion: As a headline, economies going into recession doesn’t inspire huge confidence in a commodity rebound. However, history does suggest that an economic slowdown combined with high inflation has been associated with positive commodity and gold performance.” (Nov. 2022)

What asset classes make up real assets? Orion’s The Weighing Machine has podcasts on these topics:

• Commodities
• Real estate
• Infrastructure
• Natural resource (materials and energy) stocks:  stay tuned for an upcoming podcast!

It could be argued that guessing Fed policy is one of the biggest drivers in the market right now. What is the CME Group’s FedWatch tool currently showing?

• First, after last week’s first positive surprise on inflation data in quite some time, the odds shifted to an 80% chance of a 50 basis point increase in the next Fed move in December; 20% chance of a 75 basis point move (CME Group, Nov. 2022).
• For the end of next year, meanwhile, the market odds suggest less than a 30% chance of the Fed Funds being over 4.75 (only 75 basis points higher) (CME Group, Nov. 2022). In my opinion, that’s a risk. Some notable economists are still thinking a 6% handle of Fed Funds is possible (CME Group, Nov. 2022). Also of note, the market gives a less than 1% chance that the Fed Funds could be lower than it is now (CME Group, Nov. 2022).

WisdomTree shows how far inflation is still above the Fed’s target in its September 2022 chart from The St. Louis Federal Reserve Bank.

The primary economic data release last week was the Consumer Price Index (CPI), which came in lower than expected at a 7.7% annual growth rate (US Bureau of Labor Statistics, Nov. 2022).

As for the economic calendar posted by Calculated Risk this week:

• Tuesday, November 15: Producer Price Index (PPI). Consensus is for a 0.5% increase in PPI.
• Wednesday, November 16: Mortgage purchase applications index released
• Wednesday, November 16: The Fed will release Industrial Production and Capacity Utilization
• Friday, November 18: Existing Home Sales for October

Despite all the concerns about economic weakness in the near future, it should be noted that this quarter is looking great so far. The Atlanta Fed’s GDPNow‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) for fourth-quarter 2022 is currently at 4.0% as of November 9, 2022.

As for earnings, third-quarter earnings according to I/B/E/S earnings data from Refinitiv:

• The 22Q3 Y/Y blended earnings growth estimate is 4.1% (Refinitiv, Nov. 2022). If the energy sector is excluded, the growth rate for the index is -3.6% (Refinitiv, Nov. 2022).
• Of the 460 companies in the S&P 500 that have reported earnings to date for 22Q3 70.7% reported above analyst expectations (Refinitiv, Nov. 2022). This compares to a long-term average of 66% (Refinitiv, Nov. 2022).
• The 22Q3 Y/Y blended revenue growth estimate is 11.5% (Refinitiv, Nov. 2022). If the energy sector is excluded, the growth rate for the index is 8.1% (Refinitiv, Nov. 2022).

More WisdomTree… gave a nice overview (though the Zacks Investment Research chart as of September 30, 2022 is a week old) of recent corporate earnings. Takeaway? Expect lower earnings growth in 2023.

Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager

• Cryptocurrency prices plummeted last week as the FTX bankruptcy ripples through the industry (CoinMarketCap, Nov. 2022). Bitcoin fell more than 22% through Sunday afternoon to trade under $17,000 (CoinMarketCap, Nov. 2022). Ethereum shed nearly a quarter of its value (CoinMarketCap, Nov. 2022). Solana, a coin that FTX held large reserves of, dropped nearly 60% (CoinMarketCap, Nov. 2022). Late Friday selling by “unauthorized accounts” that were linked to FTX contributed further to price declines (CoinMarketCap, Nov. 2022).
• Crypto exchange FTX, whose founder Sam Bankman-Fried was at one point compared to Warren Buffett, filed for bankruptcy (Arcane Research, Nov. 2022). Competitor and behemoth crypto exchange Binance originally had offered to step in and save FTX, but after a review of FTX’s financial situation they backed away (Arcane Research, Nov. 2022). Only a few months ago, it was FTX that was stepping in to save other firms using their presumably strong liquidity position (Arcane Research, Nov. 2022). It is estimated that FTX has somewhere between $10-$50 billion in liabilities – what a range (Arcane Research, Nov. 2022). News continues to come out on the matter, but it is now being reported that FTX was using customer funds to cover up for losses in its trading unit, Alameda Research (Arcane Research, Nov. 2022).
• No new digital asset ETFs this week. The short/inverse Bitcoin ETF had by far its largest week of trading yet (DeCrypt, Nov. 2022).

Additional Resources

“The investor’s chief problem—and even his worst enemy—is likely to be himself.”— Benjamin Graham (GoodReads, Nov. 2022).

Last week’s Orion’s The Weighing Machine podcast was with Andrew Beer from Dynamic Beta Investments. It’s a thought-provoking interview in several ways, including his view on alternative investment strategies, especially managed futures. The podcast has had a nice response. Thanks for listening. This week we have Sam Lau from DoubleLine, which is known to be one of the biggest and most active fixed income managers. In their communications, led by their leader Jeff Gundlach, they are known for not pulling any punches on their market views. Sam doesn’t either.

Be on the lookout for Orion’s next “Weighing The Risks” podcast which will be published November 21. Our special guest is Kim Arthur from Main Management and the topic is: “Geopolitical Turbulence: Prepare for the Future by Stress-Testing Different Scenarios”. Kim, as always, was well prepared, a great guest, and gave plenty of talking points to consider when talking to advisors and investors. He’s good.

Most important skill in finance (and any industry)?: Communication and salesmanship (A Wealth of Common Sense, Nov. 2022).

Jason Zweig’s classic Wall Street Journal articles on advisor due diligence: The 19 Questions to Ask Your Financial Adviser (Aug. 2017) and “The Special Trick To Find the Right Financial Adviser” (Sept. 2017).

While I think Ryan Holiday’s “Discipline is Destiny” will be a holiday best-seller (especially if you have teenage boys around), one of his prior classics, “The Obstacle Is The Way”, is sort of captured in an excellent tweet by Trung Phan on June 18, 2022 that was in response to somebody speculating on Charlie Munger’s response to crypto price action of late.

Speaking of Charlie Munger, check out the graphic in a tweet by Brian Roemmele on November 6, 2022 on the Charlie Munger / Warren Buffett / Berkshire Hathaway Portfolio.

What Makes a Good Meeting? It’s a short read but, in the end, it is about the process, not the result (Klement on Investing, Nov. 2022):

1. A meeting is more than an agenda. Meetings need a purpose and a goal. Meetings that are relevant create engagement during and after the meeting.
2. A meeting is about interaction. Meetings are social gatherings where we get to know our colleagues and intensify collaboration and meetings have the purpose to enhance team cohesion and trust.
3. A meeting is about focus. While fostering social cohesion and trust is key to motivating people, distractions and going off-topic should be avoided.
4. A meeting is about leadership. If a meeting doesn’t have a leader, it is not a meeting, it is a water cooler chat with more than two participants.
5. A meeting is more than a group of people sitting around a table.  Move the location and format if necessary.

Check out the Financial AdvisorTech Solutions Map from Kitces in October 2022 (hat tip to Chris Malsam for this one!) You can click on any icon and go to that firm’s website. Lot of work went into the graphic. Very cool.

Thanks for reading and have a great week! As always, please let us know what we can do better at rusty@orion.com or ben.vaske@orion.com. Invest well and be well.

For financial advisors to get this commentary delivered straight to your inbox, please subscribe at www.orionportfoliosolutions.com/blog.

2211-OPS-11/15/2022

Orion Portfolio Solutions, LLC, a registered investment advisor, is an affiliated company of Brinker Capital Investments, LLC, a registered investment advisor, through their parent company, Orion Advisor Solutions, Inc.

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/.

The CAIA® is the globally-recognized credential for professionals managing, analyzing, distributing, or regulating alternative investments. To learn more about the CAIA, visit https://caia.org/.