Market Insights: Last Week in Review with Rusty Vanneman, Vol. 74

The summer is moving fast. Hope you’re having a great summer.

Last week was a nice week of gains for the stock market. Match that with the Friday before, and the quarter is off to a nice start.  Growth stocks are leading the way.

• The overall US Market gained about 2% last week, now down roughly 19% on the year (Morningstar, July 2022).
• Growth stocks gained about 5%, value stocks had a slight loss (Morningstar, July 2022).
• US Bond Aggregate index and commodities both lost about 1% (Morningstar, July 2022).
• The US Dollar continued to show strength with another 2% gained (Morningstar, July 2022).

Bonds were down last week though – unless the bond position had credit exposure.  High yield bonds, for instance, had a solid week of gains. (Morningstar, July 2022).

It was indeed a reversal for Ten-year Treasury yields last week, as they finished at 3.10% (up 0.21% over the last week).  Last week’s high was 3.10% (Yahoo! Finance, July 2022).

• The average 30-year fixed mortgage rate, however, dropped last week to 5.67% (as of July 8), dropping 16 basis points (Bankrate, July 2022).
• The yield to maturity on the Bloomberg Aggregate Bond Index was 3.77% as of July 8. The June 14 high of 4.03%.
• The average money market yield is 1.22% as of July 9, 2022 (Crane Data, July 2022).

Deeper Dive 

For the year, there is still a lot of dark red in terms of returns (Morningstar, July 2022). The only bright spots, at least in terms of absolute returns, and despite sharp underperformance of late, include energy stocks and commodity prices.

Looking at economic conditions and commodity returns, how do commodities behave around recessions?  In short, they tend to rally into recessions, according to a Bloomberg chart on “Commodities Around Recessions” (July 2022).

It still seems more likely than not, that we are NOT in a recession. At least not yet. As pointed out last week in a Ben Carlson article on the recession debate: “The typical U.S. household earned more than ever as of May—even after accounting for inflation. And their finances were secure, with consumer spending rising at a steady clip even as their saving rate remained elevated.”

Something else that is not in contraction mode, is the interest in ETFs. ETF flows continue to boom according to Schwab’s Monthly ETF Report for May 2022. Highlights from the report include not only record flows for ETFs in general, but also for flows in strategic beta (i.e., factor-based or smart beta ETFs like value ETFs) and actively managed ETFs. The latter hit new record highs for assets under management. Both continue to confirm the move in investor assets from mutual funds to ETFs.

The big economic number in last week’s economic data was Friday’s non-farm payrolls number (CNBC, July 2022).

• Last Friday’s strong June employment report reported that the economy added 372,000 jobs, about 120,000 more than expected (CNBC, July 2022). This strong number likely reinforced expectations that the Federal Reserve will raise rates by another 75 basis points later this month.
• The unemployment rate was 3.6% (CNBC, July 2022).

There was improvement in last week’s 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 second quarter 2022 GDP to be -1.2% as of 7/8/22.

Outside of Monday, it’s a fairly full week for this week’s economic schedule. Earnings, Fed Speak and inflation data will be the key data points.

• The top report will be the Consumer Price Index for June on Wednesday. The consensus is for a 1.1% increase in CPI, and a 0.6% increase in core CPI. The consensus is for CPI to be up 8.8% year-over-year and core CPI to be up 5.8% YoY (Calculated Risk Blog, July 2022).

Inflationary pressures are starting to slow. While it seems I’m still setting personal records for gasoline bills, it is now four weeks in a row for a price drop in the average gas price (AAA, July 2022). It moved down to $4.68 (down another 13 cents from the prior week) as of July 10, 2022.

As for earnings, second-quarter earnings for the S&P 500 are expected to grow by just under 6%, according to I/B/E/S data from Refinitiv. The third- and fourth quarter estimates have been moving down slightly, but are still 10.9% and 10.5%, respectively.

To some, one of the most important economic data points in explaining the markets and economy in recent years has been the tremendous amount of money sloshing around in the system. On that point, an important economic release in late June was the continued drop in money supply growth.

• According to First Trust, the amount of M2 money in circulation rose just 0.1% in May (after falling in April).
• As a result, the 12-month change fell to 6.6%, the slowest growth rate since the pre-pandemic days of 2019 (First Trust, July 2022).
• Six percent growth is what we would consider “normal” from a historical perspective (First Trust, July 2022).
• So far in 2022, the money supply has grown at a modest 3.1% annualized rate (First Trust, July 2022).
• Nonetheless, given that M2 measure of money grew at an 18% annualized rate in 2020-21, or roughly three times the “normal” rate, and it will take multiple years for the US economy to fully digest all that excess purchasing power even if the money supply slows in the year ahead (First Trust, July 2022).
• It’sworth noting that recent money supply growth is being affected by unusually large tax payments. In April the US Treasury posted a $308 billion surplus – the largest on record (First Trust, July 2022).
• This allowed the Treasury to shrink its own checking accounts.  This caused April’s M2 number to post a rare monthly decline and it clearly could have affected M2 in May as well. It’s possible this is just a temporary factor holding back M2 growth rates, and the Treasury will certainly not run a surplus this year. We will get a clearer picture in the months ahead (First Trust, July 2022).

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

• Cryptocurrency prices rebounded last week, as Bitcoin rose over 8% near $21,000. Ethereum climbed double-digits, +10% above $1,100. Other large coins like Solana +13% and Avalanche +17% had a good 7-day run as well (CoinMarketCap, July 2022)
• Voyager, a cryptocurrency broker that is publicly traded in Canada, filed for Bankruptcy. Vauld – another crypto lending platform – halted withdrawals and now looks like it will be acquired soon, as consolidation continues. A second Ethereum ‘testnet’ transitioned to proof-of-stake rather than energy intensive proof-of-work that Ethereum and Bitcoin currently run on. In the coming months, the entire Ethereum network is expected to move to proof-of-stake in what is referred to as “The Merge” (Arcane Research, July 2022).
• There were no new digital asset related ETF launches last week. The short Bitcoin ETF, BITI, tripled in size last week, now holding the equivalent of short 3,811 Bitcoin (Decrypt, July 2022).

Additional Resources  

“The investor’s chief problem – and his worst enemy – is likely to be himself. In the end, how your investments behave is much less important than how you behave.” Benjamin Graham often referred to as the “father of value investing” and he often emphasized how important it is for investors to keep their emotions in check (i-Vest, Feb. 2022).

Growth stocks have been outperforming of late. Want to learn more? On this week’s Orion’s The Weighing Machine podcast we hear from Brian Demain and Cody Wheaton from Janus Henderson who manage their mid-cap growth strategy. These guys are sharp, and it shows. They make a compelling argument for why mid-cap growth deserves strategic consideration in portfolios moving forward.

Speaking of podcasts, a popular podcaster is Tim Ferris. He is good. Recently, he had Ed Thorpe on, a well-known investment manager and card player. Fascinating interview, particularly given that Thorpe is 89 years old. (Edward O. Thorpe on The Tim Ferriss Show).

JP Morgan has a chart titled, “An important chart for investors” from its 3Q 2022 “Guide to the Markets” presentation. The message for long-term investors is classic: it’s always prudent to expect the possibility of short-term losses, but the markets have a powerful tendency to produce positive returns over time, especially over longer time periods. Of course, the soon to be updated Orion Portfolio Solutions Quarterly Reference Guide will also have this information (by the way, the current version has this chart on page 38).

What does it take to be considered wealthy in America? (Visual Capitalist, July 2022)

“Awesome Picture” of the week is from the Turner exhibit currently being shown in Boston. While I’ve always considered Turner’s “Rain, Steam and Speed” my personal favorite, this painting is similar and also seems appropriate given the recent fireworks here in the U.S. and the recent political turmoil in England. Turner’s “The Burning of the Houses of Lords and Commons” (Museum of Fine Arts Boston, July 2022).

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. 

1241-OPS-7/14/2022

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