Market Insights: Last Week in Review with Rusty Vanneman, Vol. 66

Stock market prices started the week on the wrong foot, with prices slightly lower (NASDAQ, May 2022).  

  • The only overnight news of note was disappointing growth out of China, including Chinese retail sales down 11% year over year (CNBC, May 2022).
  •  The retail sector will be in focus this week as Walmart and other consumer giants report earnings (CNBC, May 2022).  The April Retail Sales report was released on Tuesday.

 Last week had a lot of ugly market action. 

  • The S&P 500 dropped for a sixth straight week, its worst losing streak since June 2011, according to Dow Jones Market Data (May 2022).
  • The Nasdaq Composite also declined for a sixth consecutive week, booking its longest losing streak since November 2012 (Dow Jones Market Data, May 2022). 
  • This was despite the NAZ having its biggest daily percentage gain since Nov. 4, 2020, according to Dow Jones Market Data (May 2022).
  • The Nasdaq and Russell 2000’s recent losses took them back to levels not seen since around the November 2020 election (Dow Jones Market Data, May 2022). 
  • Also of note is that the S&P 500 came within 0.1% of official bear market status (as defined as a loss of 20% from its price highs) (Dow Jones Market Data, May 2022).

 Last week, the US market was down over 2% (Morningstar Direct, May 2022).

  • Growth stocks were down over 3%, while value was down over 1% (Morningstar Direct, May 2022).
  • Sector losses were led by technology stocks, energy stocks, and financial stocks, all with over 3% losses (Morningstar Direct, May 2022).

What a week for interest rates.  Ten-year Treasury yields ended the week at 2.94% (down 0.18% over the last week) but hit a high of 3.17% last Monday (Yahoo Finance, May 2022).

  • The last time The Tens were that high was November 2018 (Yahoo Finance, May 2022).    
  •  It wasn’t that long ago that The Tens were basically at 0.50% back in the summer of 2020 (Yahoo Finance, May 2022). 
  • The Ten-year finished 2021 at about 1.50% for an additional frame of reference (Yahoo Finance, May 2022).

Deeper Dive

Year-to-date, the US market is now down over 16%, with the S&P 500 down just over 15% (Yahoo Finance, May 2022).

  • Growth stocks are down over 30%, and value stocks are now down nearly 2% (Morningstar Direct, May 2022).
  • Energy stocks and commodities are still burning the brightest this year, with gains of 44% and 30%, respectively (Morningstar Direct, May 2022).

This year has been tough.  According to Bespoke Investments (as of last Wednesday), among the top 30 stocks, there are only a few stocks that have made money this year (May 2022). Among the 30 largest companies, only Berkshire Hathaway, Johnson & Johnson, Walmart, Exxon Mobil, Eli Lilly, and Coca-Cola had gains (Bespoke Investments, May 2022).

Here’s something very interesting to watch moving forward.  Heading into last Friday (before Nasdaq’s huge day Friday), value stocks were less than 1% below growth stocks for 3-year returns (CNBC, May 2022). 

While growth concerns continue to increase with investors, inflation continues to be the dominant story. Among small business owners, inflation has skyrocketed lately in terms of the “single most important problem (Yahoo Finance, May 2022).”

Inflation is a problem in other countries too, but did you know it’s the worst in the US among the G7 developed economies according to this stat-loaded article from Jim Bianco (Advisor Perspectives, May 2022)?

Okay, now on the more positive side of things.  

  • First, market-based inflation expectations have been dropping.  As referred to by Bloomberg columnist John Authers (May 2022): “The prospect of a morale-boosting decline in the headline has contributed to the greatest splurge of optimism on inflation to have been seen in a while. Breakeven forecasts for the next five and 10 years, and for the period from 2027 to 2032 (the so-called five-year/five-year breakeven) are all dropping sharply and have all now dipped below the significant 3% level.”
  • Second, the weekly AAII Sentiment Survey still shows a big imbalance toward bearish sentiment (May 2022). This is typically a contrarian indicator.   
    • According to Bespoke Investments, when net bullish sentiment has been this weak since 2008, the market on average (and on median) has substantially produced higher than average 1-, 3-, 6- 12 months returns moving forward (May 2022).
  • Third, consumers are in great shape. For example, checking account balances are 4x higher than they were before COVID (Washington Post, February 2022).

Last week’s economic data had two key inflation numbers.  Are the monthly inflation numbers now more important than the monthly employment numbers? 

  • The Consumer Price Index (CPI) increased by 0.3% in April, above the consensus expected +0.2% (First Trust Data Watch, May 2022).  The CPI is up 8.3% from a year ago (First Trust Data Watch, May 2022).
  • The Producer Price Index (PPI) rose 0.5% in April, matching consensus expectations (First Trust Data Watch, May 2022).  Producer prices are up 11% from a year ago (First Trust Data Watch, May 2022).

The Atlanta Fed’s initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) for the second quarter of 2022 is 1.8 (down 0.1 from the week before) (May 2022).

It’s mostly good news for corporate earnings, according to the weekly FactSet earnings report (May 2022).

  • For Q1 2022 with 91% of S&P 500 companies reporting actual results, 77% of S&P 500 companies have reported positive earnings per share surprise and 74% of S&P 500 companies have reported a positive revenue surprise (FactSet, May 2022). 

There is a lot of housing data on this week’s economic schedule, and we have the Fed Chair speaking on Tuesday (Calculated Risk Finance & Economics, May 2022). Speaking of housing, according to seemingly oft-quoted numbers from multi-decade market analyst Jim Bianco:

  • According to Zillow, as of March, the median home value was $338,000, and it increased over the prior 12 months by $58,000 or 20.9% (May 2022).
  • The median income in the U.S. is approximately $50,000 (Zillow, May 2022). For homeowners, your house made you more money than your job did.
  • That has never happened, Bianco said, even during the peak housing boom year of 2006 (Advisor Perspectives, May 2022).
  • According to Redfin, the percentage of homes selling for more than their list price was 15%-20% before the pandemic (April 2022). Now it is 55% (May 2022).
  • “If 55% of homes are going above list,” Bianco said, “real estate brokers don’t understand the market.” (Advisor Perspectives, May 2022).

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

  • The bottom fell out of cryptocurrency prices last week (CNBC, May 2022). Bitcoin was down as much as -25% before recovering somewhat toward the end of the week, hovering around $30k on Sunday (-13% on the week) (CNBC, May 2022).
  • Ethereum regained the $2,000 level but is still down nearly -20% (CNBC, May 2022). Other coins fared quite a bit worse – Cardano, Solana, Avalanche, and Dogecoin all fell by 25-30% – a large decline but still masking even larger declines mid-week (CNBC, May 2022).
  • The story of the week – if not the year – was the collapse of one of the largest stablecoins, TerraUST, and its related Luna coin (CNBC, May 2022). The ‘algorithmic stablecoin’ lost its $1 peg and wiped out nearly $40 Billion of value (CNBC, May 2022). The coin was partially backed by reserves of other cryptocurrencies, which then were sold to defend the peg and led to further declines in the space (CNBC, May 2022). Elsewhere, FTX CEO and crypto billionaire Sam Bankman-Fried took a 7.6% stake in Robinhood (CNBC, May 2022). Coinbase missed revenue expectations on Wednesday and sent the stock into a steep drawdown (CNBC, May 2022).
  • In ETFs, several European ETFs tied to the price of Luna collapsed alongside the coin (CNBC, May 2022).

Additional Resources 

Values-aligned investing, which includes ESG and faith-based investing, is the topic on this week’s Orion’s The Weighing Machine podcast with Theresa Gusman from First Affirmative. This episode is a good overview of an important topic, and it might convince some people on the fence regarding ESG to start investing. 

“For those who expect everything, there are many curses. For those who appreciate everything, there are many blessings.” James Clear 

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.

0874-OPS-5/20/2022
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
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).