Market Insights: Last Week in Review with Rusty Vanneman, Vol. 64

The stock market started the week with slightly lower prices (as of this writing), though it follows up the worst April for the S&P 500 since World War II according to Bloomberg’s John Authers (Bloomberg, April 2022).

There are a lot of ugly numbers to report looking back in the rear-view mirror.  Here are just a couple according to The Bespoke Report (April 2022):

  •  With a decline of over 13%, the S&P is off to its third-worst start to a year in the post-WWII period, while the Nasdaq, with its decline of over 21%, has never had a weaker start in the first four months of the year (data back to 1971).
  • The S&P 500 has now declined at least 1% for four straight weeks while the Nasdaq has been down at least 2.5% for four straight weeks. Since 1971, there have only been four other times where the Nasdaq experienced a similar streak.

Last week’s returns were indeed tough (CNBC, April 2022). US stocks were down 3% (CNBC, April 2022). International stocks lost about half that (CBNC, April 2022). The only major asset classes that were higher were bonds, emerging market stocks, commodities, and the dollar (Morningstar Direct, April 2022).

For the month, US stocks were down 9% (CNBC, April 2022). The dollar meanwhile, is on fire, and it gained 5% (The Wall Street Journal, April 2022).  Thing is, when the dollar is up, that generally means commodities are down (but they gained 4%) and international stocks underperform (but they outperformed the US by 3%) (CNBC, April 2022).   

A bit more on the US dollar. It just had its best month since 2015 (CNBC, April 2022).  A big part of that is Japan (which is not following most of the world and raising interest rates) which has watched the yen drop to 20-year lows (Financial Times, April 2022). 

Given the weakness in stocks last week, Ten Year Treasury Yields closed at 2.89% (down 2 basis points from the week before) (Yahoo Finance, April 2022). 

More tidbits on some key April and year-to-date returns:

  • For April, US Growth stocks were down nearly 16% after a near 5% loss on the final day of the month (MarketWatch, May 2022). Year-to-date, the US growth index is now down nearly 26% (MarketWatch, May 2022).
  • Value stocks also suffered losses in April of over 4% and are now down just over 2% for the year (CNBC, May 2022).
  • The US Bond Aggregate Index was down over 3% for the month and down over 9% for the year (Yahoo Finance, May 2022).
  • Commodities gained 4% in April and are now up almost 31% for the year (Yahoo Finance, May 2022).

As of last Friday, the S&P is still holding onto a slight 1-year return (+0.2%) while the overall US market is now down nearly 3% (CNBC, May 2022).  

As for returns over the last 3-years, the US market is still up 13%/year (Yahoo Finance, May 2022). The S&P is up 14%/year (Yahoo Finance, May 2022).  Leadership in the 3-year time frame is still from large/growth/tech (Yahoo Finance, May 2022).  Commodities, however, are up 18%/year over the last 3 years (Yahoo Finance, May 2022).

Value has been significantly outperforming Growth this year and for the last year (Morningstar Direct, May 2022). The 3-year relative-performance, however, still shows that Growth’s annualized return of 14%/year is still better than Value’s annualized return over the last 3 years of 10%/year (Morningstar Direct, May 2022).  

Commodities/real assets have had a big run so far this year, especially versus traditional asset classes like the S&P 500 (Morningstar Direct, May 2022).  Throughout history, the asset class tends to do that. 

Remember how just a few months ago Berkshire Hathaway had underperformed the US market in nearly all trailing time frames (MarketWatch April 2022)?  Some in the press said that Buffett had finally lost it. Well, thanks to a strong start to this year, BRK has now outperformed the overall US stock market over the last 1-, 3-, 5-, 10- and 15-years (CNBC, May 2022).  Buffett is back to being smart again!

Since I mentioned BRK, getting back to the Berkshire Hathaway meeting, for the experienced Buffett/Munger watcher, there weren’t too many surprises in this weekend’s CNBC’s BRK Shareholder Meeting Highlights (April 2022).  It was mildly interesting to see increased stakes in the energy sector (Chevron) and video gaming (Activision) (CNBC, April 2022). As always, Buffett/Munger ultimately stress the importance of discipline and temperament in making investment decisions and the importance of culture (CNBC, April 2022).

An article last week about the last great investment manager John Neff (Wise Words from John Neff) also stressed the point of discipline in investing, and how it is important for investors with a fundamental value orientation to stay disciplined (though I would say this applies to all investment managers, not just value managers) (Novel Investor, April 2022).

The weekly AAII Sentiment Survey sank again last week.  There are a few ways to cut the data. One could say net bullish sentiment dropped to its lowest level since February 2016 (AAII Sentiment Survey, May 2022).  Another interpretation is that it’s the lowest since March 2009 (right before the epic bull market) (AAII Sentiment Survey, May 2022).  Sentiment extremes, however, tend to be contrarian indicators and in this case suggest better returns ahead. Expectations will eventually start to get better and stock prices will snap back accordingly. 

Deeper Dive

Last week had a lot of notable economic data. Let’s start with the surprising first estimate of the 1Q22 GDP number. It was bad, and technically started the clock on a potential recession (i.e, officially classified as 2 quarters of economic contraction), but upon further inspection, it wasn’t as bad as it looked.  

  • Real GDP declined at a 1.4% annual rate in Q1, widely lagging the consensus expectation (CNBC, April 2022).
  • The largest negative drag on the real GDP growth rate in Q1, by far, was net exports, with inventories and government purchases also holding real GDP down (CNBC, April 2022).
  •  Consumer spending, business investment in equipment and intellectual property, as well as home building all increased in Q1 combined and grew at a 3.7% annual rate in Q1 (CNBC, April 2022).
  •  The GDP price index increased at an 8.0% annual rate in Q1 and is up 6.8% from a year ago (CNBC, April 2022). Nominal GDP (real GDP plus inflation) rose at a 6.5% annual rate in Q1 and is up 10.6% from a year ago (CNBC, April 2022). 

Even last week’s Personal Income for March was loaded with sensational data points and something for both economic bulls and bears to feed on.  Some of these bullets were:

  • Compared to a year ago, personal income is down 12%, but that is entirely due to stimulus checks that were distributed as one-time payments last March (DataWatch, April 2022). Strip out government transfer payments, and personal income is up 9% in the past year, with private-sector wages and salaries up a massive 13% over that time (DataWatch, April 2022).
  • PCE prices, the Fed’s preferred measure of inflation, rose 0.9% in March (the largest monthly increase in more than 15 years), and are up 7% from a year ago, a pace of inflation not seen since 1982 (DataWatch, April 2022).
  • Since bottoming in April of 2020, consumption has grown at an astronomical 19% annualized rate, and spending today stands 14% above February 2020 levels (DataWatch, April 2022).

New single-family home sales housing data dropped 8.6% in March (DataWatch, April 2022). Sales are down 12.6% from a year ago (DataWatch, April 2022).

  • The month’s supply of new homes (how long it would take to sell all the homes in inventory) rose to 6.4 in March from 5.6 in February (DataWatch, April 2022).  This is the highest level since 2008 (DataWatch, April 2022). 
  •  However, doing a similar calculation with only completed homes on the market shows a month’s supply of a meager 0.6, near the lowest level on record back in 1999 (DataWatch, April 2022). 
  •  The median price of new homes sold was $436,700 in March, up 21.4% from a year ago (DataWatch, April 2022).  The average price of new homes sold was $523,900, up 26.3% versus last year (DataWatch, April 2022). 

In other housing news, home prices soared in February (Yahoo News, April 2022).  The national Case-Shiller index rose 1.9% for the month, the fastest pace for any month on record (dating back to 1975) (DataWatch, April 2022). The Case-Shiller index is up 20% versus a year ago (DataWatch, April 2022).

  • The FHFA index, which measures prices for homes financed with conforming mortgages, rose 2.1% in February, also the fastest pace on record (dating back to 1991) (DataWatch, April 2022).  The FHA index is up 20% from a year ago (DataWatch, April 2022).  

The Atlanta Fed‘s initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) for the second quarter of 2022 is 1.9 percent on April 29 (Federal Reserve Bank of Atlanta, May 2022).

  • The initial estimate of first-quarter real GDP growth released by the US Bureau of Economic Analysis on April 28 was -1.4%, which was 1.8% below the final GDPNow model nowcast released on April 27 (Federal Reserve Bank of Atlanta, May 2022). 

The corporate earnings season, at least to the weekly Factset report, is mostly good news.

  •  Overall, 55% of the companies in the S&P 500 have reported actual results for Q1 2022 to date (FactSet, April 2022).
  • Of these companies, 80% have reported actual earnings per share above estimates, which is above the five-year average of 77% (FactSet, April 2022).
  • In aggregate, companies are reporting earnings that are 3.4% above estimates, which is below the five-year average of 8.9% (FactSet, April 2022).
  •  The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the first quarter is 7.1% today, compared to an earnings growth rate of 6.5% last week and an earnings growth rate of 4.7% at the end of the first quarter 2022 (FactSet, April 2022).

Here’s a long-term plus for the markets: less supply. IPO activity was down according to Bloomberg News as they reported on March 26: “About $65 billion has been raised via IPOs around the world in 2022, down 70% from $219 billion in the first three months of last year, according to data compiled by Bloomberg. That puts the global market on track for the lowest quarterly proceeds since the onset of the coronavirus pandemic in 2020.” (Bloomberg News, March 2022).

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

  • Crypto prices struggled last week. Bitcoin was hovering around $38k on Sunday afternoon, down 3% over the last week (CNBC, April 2022). Ethereum fell slightly less than 5%, and other alternative coins fell double-digits (CNBC, April 2022). Dogecoin managed to stay in the green last week as Elon Musk (Dogecoin’s wealthiest fan) secured a deal to buy Twitter (CNBC, April 2022).
  • Fidelity announced that it will allow 401(k) plan participants that use Fidelity’s platform to allocate up to 20% to Bitcoin (via ownership of a separate Digital Asset Account) (Fidelity, April 2022). The Central African Republic became the second country to adopt Bitcoin as legal tender (El Salvador was the first) (CNBC, April 2022). And in what may be one of the first times that Omaha, Nebraska affected cryptocurrency prices, Warren Buffett and Charlie Munger created a Saturday-afternoon drop in prices after a series of negative comments at the Berkshire Hathaway annual shareholders meeting (CNBC, April 2022).
  •  BlackRock launched its first Blockchain ETF, the iShares Blockchain and Tech ETF (IBLC) last week (CNBC, April 2022). First Trust launched a Metaverse ETF (ARVR) a week prior (CNBC, April 2022).

Additional Resources 

Over the years, I have enjoyed hosting Orion’s The Weighing Machine podcast and it’s hard to say what my favorite(s) episodes have been.  On my shortlist to consider though, would be this week’s interview of “The Inflation Guy” ( @inflation_guy ) Mike Ashton from Enduring Investments.  Robyn and I interviewed him over a year ago and he nailed the inflation story then, and his interview that was recorded a few weeks ago felt important moving forward as well.   

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. 

0824-OPS-5/12/2022
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, CFA, CMT
Rusty Vanneman serves as the Chief Investment Strategist for Orion Advisor Solutions. An industry veteran with more than 30 years of investment experience, Rusty creates relevant market- and platform-related content that supports deeper, more engaging conversations with advisors and investors, educating key internal and external audiences on Orion Portfolio Solutions’ strategies and resources to help deliver favorable investor outcomes, and helps identify new investment offerings to meet growing marketplace demand. Rusty is a host of Orion’s The Weighing Machine podcast and authored the book “Higher Calling: A Guide to Helping Investors Achieve Their Goals.” Rusty has also managed multiple mutual funds and hedge funds during his career and was named one of the Top 10 Portfolio Managers to Watch by Money Management Executive in 2017. Prior to Orion’s acquisition of Brinker Capital in 2020, Rusty was the Chief Investment Officer for Orion Advisor Solutions and prior to that was the President and Chief Investment Officer of CLS Investments. Before joining Orion in 2012, Rusty served as the Chief Investment Officer and Managing Director for a multi-billion-dollar registered investment advisor (Kobren Insight Management) in the greater Boston area. His 11-year tenure at the RIA included a five-year span when the firm was owned by E*TRADE Financial where he also served as the Senior Market Strategist for E*TRADE Capital. Prior, Rusty was a Senior Analyst at Fidelity Management and Research (FMR Co) in Boston. Additional work experience includes Thomson Reuters, General Electric, and as a cattle ranch hand in the Nebraska Sand Hills. Rusty received his Bachelor of Science in Management from Babson College in Wellesley, Massachusetts, where he graduated with high distinction. He holds the Chartered Financial Analyst (CFA®) designation and is a member of the CFA Institute. He is also a Chartered Market Technician® (CMT) and is a member of the Market Technician’s Association (MTA).