Market Insights: Last Week in Review with Rusty Vanneman, Vol. 73

Hope you had a great holiday weekend.

Ben and I have a lot of Bullets this week. Given the historic first half of the year, there was so much notable (some not so cheery) material to pick from.

  • Our primary goal for these Bullets each week is to hopefully provide some curated talking points about the markets, the economy and investment strategies that help in conversations. We also hope to provide some useful resources and a smile or two.
  • As always, please let us know if there is something you would like to see or hear.

Though Tuesday was likely to start off weak, the quarter is still officially off to a nice start given Friday’s gains. So far, so good!

Last month’s returns were pretty tough, though. No matter if you were looking at value or growth, large cap or small, international or domestic, the stock market lost about 8-9% in June (CNBC, July 2022).

  • Emerging markets “only” lost 7% in the aggregate, as the Chinese market was actually higher in June (CNBC, July 2022).
  • Diversifiers didn’t help. Bonds lost 2%. Alternatives lost 4%. Commodities lost 11%. Real estate (REITS) lost 7% (CNBC, July 2022).

Ten-year Treasury yields finished last week at 2.89% (down another 0.24% over the last week). Last week’s low was 2.79%. This is a heckuva drop over the last few weeks as the recent high on June 14 was 3.48% (highest level since 2011) (Yahoo! Finance, July 2022).

  • The average 30-year fixed mortgage rate, however, only dropped to 5.83% as of July 3 (Bankrate, July 2022). The cycle high of 5.91% was on June 17, 2022. So, let’s see … The 10-year Treasury dropped nearly 0.75% from intra-day high to low over the last few weeks, but 30-year mortgages only dropped 0.08%? (Bankrate, July 2022.)
  • The yield to maturity on the Bloomberg Aggregate Bond Index was 3.60% as of July 1. The June 14 high of 4.03%.
  • Okay, here’s one rate that has finally jumped up. As of the end of June, the average money market rate is now 1.35%, at least according to (other websites are showing lower average rates).

Deeper Dive

Returns in the second quarter were rough too (using Morningstar indices for equity returns)

  • US Market down about 17%; international stocks down 14%
  • Growth stocks down about 25%; Value stocks down about 9%
  • Bond Agg Index down about 5%; Commodities down about 6%

For the year:

  • US Market down about 21%; international stocks down 19%
  • Growth stocks down about 34%; Value stocks down about 7%
  • Bond Agg Index down about 10%; Commodities up about 18%

Ben Carlson, as usual, provides a ton of data points on why the first six months of this year qualify for the short list for the worst 6 months ever for financial markets, but he also talks about why expected returns moving forward look a lot more attractive and why he’s a better buyer (A Wealth of Common Sense, July 2022).

  • “If you’re making contributions to a 401(k) or IRA on a periodic basis you can now buy the stock market at prices that are 20-30% lower than they were just 6 months ago.”
  • “You can also earn around 3% on intermediate-term U.S. government bonds instead of the 0.4% to 0.9% you could earn just 18 months ago.”

How bad was it for bonds so far this year? Worst 6 months for 10-year Treasuries since 1788! (@JesseFelder on Twitter, July 2022).

What happens to stocks after a bad first 6 months of the year? There are numerous articles on this topic. Take your pick depending on your mood.

  • One hopeful take is comparing this year to 1970, since the first half of 2022 was rivalling the worst for US stocks since 1970. When the S&P 500 plunged 21% in the first half of 1970, it promptly reversed those losses to gain nearly 27% in the second half (CNBC, June 2022).
  • However, according to the research firm Strategas, and looking at data since 1950, the odds of a positive return the next 6 months is only 54%, which is well below the average probability of a positive return over the next 6 months. The average return in those years is positive, but also below the long-term average 6-month returns.

Three-year performance, in my opinion, is the number that drives the most investor flows. Note that no story lines changed by quarter-end in terms of relative performance. Over the last three years:

  • Commodities are still outperforming US stocks: 14% vs 10% (Yahoo! Finance, June 2022)
  • US Growth stocks are still outperforming US Value stocks: 9% vs 8% (Yahoo! Finance, June 2022)
  • US large caps are still outperforming US small caps: 11% vs 4% (Yahoo! Finance, June 2022)
  • US stocks still outperforming non-US stocks: 10% vs 2% (Yahoo! Finance, June 2022)

What should investors look for to see a potential end to the bear market? According to Ned Davis Research (which I used for over 20 years), Ned thinks five things are needed for a “sizable recovery” in the second half of the year. I’m with him. Per NDR: 5 things needed for bear market to end, “a second half recovery would require improvements from inflation, the Fed, the economy, geopolitics, and earnings.”

  • Disinflation (i.e., a peak in inflation growth) could trigger a second half rally
  • Sustained yield curve inversion would signal a hard landing
  • The economy avoiding a recession
  • Getting on the other side of the midterm election. Midterm years are typically weak through Q3, on average.
  • Avoiding an earnings slowdown

Three weeks in a row for a price drop in the average gas price (AAA, July 2022). It moved down to $4.81 (down 9 cents from the prior week) as of July 4, 2022.

  • On that point, in RenMac’s excellent 15-minute-ish podcast each Friday (only 10 minutes if you speed it up fast enough) it was mentioned last Friday to expect gas prices to drop a lot in July.
  • By the way, JPMorgan wrote last week regarding oil prices of the worst case scenario: $380/barrel oil.

Good news on inflation: long-term market-based inflation expectations continue to drop and are even approaching Fed’s preferred target of 2% (Bloomberg, June 2022).

Bad news on inflation: headline CPI could approach 11% before the end of 2022, delaying “peak inflation” until 2023 (Research Affiliates, June 2022).

In my opinion, “peak inflation” is a big deal. The potential peak in inflation growth could indeed create a tailwind for the markets. Remember that markets don’t trade on whether absolute conditions are good or bad, but rather on whether they are getting better or worse relative to expectations. Looking back, and using some research from Invesco, peak inflation in 1974 and 1980 were times when things were “bad” but soon to get “better”. The economy even entered a recession in mid-1981, but the key to remember is that the stock market generally does well after peak inflation (Wealth Advisor, June 2022).

Let’s talk sentiment. A lot of articles recently on how investors have finally “capitulated”. Last week JPMorgan even wrote that investors bailed ship.

Investor sentiment does indeed remain poor, according to the latest AAII Sentiment (American Association of Individual Investors, July 2022), and that typically means above-average returns 3-, 6- and 12-months from now.

But, I would argue that we haven’t seen capitulation yet, at least not yet looking at average equity allocations according to the AAII Asset Allocation Survey.

  • Bottom line, investors are still heavily invested in stocks and near 20-year highs in equity allocations.
  • Recent stock holdings of 67.1% compares to 61.6% long-term average since November 1987 (415 months). Median 63.6%.
  • Current AAII equity allocation ranks in top 28% of all monthly equity allocations since 1987.
  • This number has slowly been coming down since the recent cycle high of 71.4% in November 2021 (top 6% of all historical equity allocations).
  • Before the November 2021, the only higher monthly equity allocation over the last 20+ years going back to the beginning of 2000 was one month in 2017 (Dec) with a reading of 72.0%.

On that last point, SG Markets even had a graphic on it last week showing that even though investor sentiment appears to have reached multi-decade lows, their analysis indicated that the average equity allocation is still extremely elevated compared to historical ranges. High equity allocation has historically preceded lower long-term equity returns, both on an absolute basis as well as relative to bonds.

While individual investors are bearish on the markets, there is one group still positive from here to year-end. It’s Wall Street! While sentiment on Wall Street isn’t as optimistic as it was earlier in the year, according to work from Aneet Chachra of Janus Henderson (hat tip to John Authers) they are unanimously bullish for the rest of the year. The S&P 500 closed at 3825 on Friday, July 1, 2022. The most negative view is for a 2% price return (not including dividend yield into the total return forecast) and the most optimistic is for a 28% price return.

Speaking of outlooks, Ben and I conducted a poll of the strategists on OPS at the end of June. Here is their outlook on the six major asset classes for the next 6 months.

Orion Portfolio Solutions Strategist Outlook (Next 6 Months)

  • Bullish on Real Assets and Absolute Return Alternatives
  • Bearish on other asset classes; most negative on US stocks

Based off of flows, performance, and questions, there has clearly been an uptick in interest/demand for real assets and alternatives. Using May flows data, here are the numbers for the major asset class breakouts on OPS:

Some have asked how much should one have in real assets? One frame of reference is by looking at the ETF Industry AUM, per Bernstein. It’s only about 5% as of 14 months ago, but given the strong outperformance of commodities since then, and now the increased investor demand, that number is surely higher.

Those are good frames of references, but how much do influential asset allocators recommend to real assets? First, what about arguably the most famous asset allocator of all, David Swensen (, May 2021)? His well-known take on a balanced long-term portfolio for individual investors included a lot of juicy nuggets including 20% in real assets (expressed through REITs), 40% international stocks for equity holdings (with an overweight in EM), and a fixed exposure split evenly between nominal and inflation-linked Treasuries (note zero exposure to credit risk)! (Of course, this was just a baseline portfolio that would need adjusted given an investor’s objectives, risk tolerance, and other unique considerations).

  • 30% US equity
  • 15% Foreign developed equity
  • 5% Emerging market equity
  • 20% US real estate (REIT)
  • 15% US Treasury Bonds
  • 15% US Treasury Inflation-Protected Securities (TIPS)

Second, William Bernstein at Efficient Frontier generally recommends about 10% to real assets in portfolios (and a bias towards strategic overweight to natural resource stocks). Also, William Bernstein’s article over a year ago about “getting real about inflation protection” showed that real assets outperformed in rising inflationary environments, and still generated positive monthly returns when inflation was above-average even if inflation was falling. Note his study is 18 months old – the data looks a lot better for his argument now.

There are the academic and strategic reasons to invest in real assets. There are some potential tactical reasons, too, besides the inflation argument. There is also the long-term cycle argument. Just Google the phrase “commodities vs stock prices” and you’ll find lots of charts, including a slightly dated one sourced from In Gold We Trust Report and posted @jessefelder on Twitter: “Compared to the S&P 500, the GSCI Commodity Index (TR) is at its lowest level in 50 years. The ratio is currently at 0.48, well below the long- term median of 4.10 and miles below the highs.” 

If 50 years of history isn’t enough, there’s 151 years of stocks to commodities posted at Longtermtrends.

Mostly negative data in last week’s economic data (First Trust, June 2022):

  • A lot of good news/bad news in the final estimate for 1Q22 Real GDP
  • Real GDP growth in first quarter was revised slightly lower to a -1.6% annual rate from a prior estimate and consensus expected -1.5%
  • The GDP price index was revised up to an 8.2% annual growth rate from a prior estimate of 8.1%
  • Nominal GDP growth – real GDP plus inflation – was revised up to a 6.6% annual rate from a prior estimate of 6.5%
  • Good news? First Trust doesn’t think first quarter was an economic contraction as “Real gross domestic income (Real GDI), an alternative measure of economic activity that is just as accurate, was up at a 1.8% rate. The problem with GDI data is that the first report doesn’t arrive until one month after the GDP data, so very few people pay attention. Closing the case against a recession in Q1 is that industrial production and jobs rose rapidly while unemployment fell.”

Last week’s various bad news fed into the latest Atlanta Fed’s GDPNow’s estimate for real (“after-inflation) GDP growth (which uses actual economic data for inputs). It now estimates for the 2nd quarter of 2022 a GDP estimate of -2.1% as of July 1, 2022. Given the 1st quarter number’s current -1.6%, this could technically mean a recession if the 2nd quarter number really is negative.

Friday’s employment data is the highlight on this week’s economic schedule.

  • The consensus is for 270,000 jobs added, and for the unemployment rate to be unchanged at 3.6% (Calculated Risk, July 2022).
  • There were 390,000 jobs added in May, and the unemployment rate was at 3.6% (Calculated Risk, July 2022).

Some draw a parallel between digital assets now and the internet/tech stocks back in the ‘90s. Both were expected to change the world. Both had huge run-ups in price, then got smashed. Most companies and investment securities didn’t make it through the crash. Well, let’s look at one tech company that survived the ‘90s, but also got smashed and severely ridiculed: Apple. It’s hard to imagine how hated the stock was. Only some value managers and its true fans continued to own Apple, some 20 years ago. Using the stock-split adjusted price of Apple, it was trading at around $1.21/share in early 2000. It then dropped 80% (!!!) by year-end 2000. For those who were patient and held it, though, the stock strongly rebounded to over $7/share (again split-adjusted price) by the end of 2007. Apple had its believers. It survived. While Bitcoin is obviously different than Apple, markets often rhyme over time due to investor sentiment and behavior. Could Bitcoin be the survivor of the digital asset boom of recent years? Some argue it will. By the way, the current price of Apple is more than $100/share (see ticker APPL).

Additional Resources

“There is virtually always an apocalypse du jour going on somewhere in the world. And on rare occasions when there is not, journalism will simply invent one, and present it 24/7 as the incipient end of the world.” Nick Murray

There are 24 charts that show we are mostly living better than our parents. (Full Stack Economics, June 2022).

This week on Orion’s The Weighing Machine podcast we hear from an experienced asset allocator and manager-of-managers Josh Emanuel, the CIO at Wilshire Advisors. Wilshire is the longest standing relationship with Orion Portfolio Solutions (and before that FTJ Fund Choice). Josh’s experience and insights are obvious.

Morningstar’s article 5 Things To Do in a Bear Market includes:

  • Reviewing savings rate or distribution rate
  • Rebalancing
  • Consider buying the dip
  • Tax loss selling
  • Consider ROTH IRA conversions

Here’s another podcast with tips on Guiding Clients Through Market Downturns, with some expert advice from Dr. Daniel Crosby and some other guy.

Normally, I don’t mention new bills or acts that the government is working on, but there are four quick ones that could impact our industry:

  • First, last week, the Senate Finance Committee approved the Enhancing American Retirement Now (EARN) Act, which contains some provisions that are included in the House-passed Secure 2.0. EARN would raise the age at which taxpayers must start making withdrawals from their retirement accounts. Raising the age from 72 to 75 allows three extra years of tax-free growth after 2031. EARN would also allow taxpayers who are between 60 and 63 to contribute an extra $10,000 to tax-preferred retirement plans that allow elective deferrals ($5,000 for Simple plans). This amount would be indexed for inflation.
  • Second, the SEC requested information and Comment on Advisers Act Regulatory Status of Index Providers, Model Portfolio Providers, and Pricing Services. In short, the SEC believes a lot of index products involve a lot of active decisions.
  • Third, and I like the possibility of this one, a new bill would allow rollovers from 529 plans to Roth IRAs (Think Advisor, June 2022).
  • For ESG investors, the Supreme Court rejects broad EPA authority to regulate greenhouse gases from power plants concluding that the EPA lacks broad authority to regulate greenhouse gas emissions from power plants under the Clean Air Act (, June 2022)

33 problems with the media in one chart at Visual (June 2022).

Good Dadding in a June 30 tweet from @derekRadleyGolf incorporating baseball and a fishing pole!

This time of year is awesome with all the fireworks in the air, but a strong seasonal favorite of mine is the awesome “summer snow” from cottonwood trees.

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


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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).