Market Insights: Last Week in Review with Rusty Vanneman, Vol. 79

School is starting in various places around the country, including in our household. Where did the summer go?

This is the time of year, of course, that quite a few people are on holiday and trading volumes in the market drop. In turn, less liquidity at this time of year can exaggerate market moves. In addition, from a seasonal perspective, the upcoming one-week period has historically been one of the weakest of the year (Morningstar, Aug. 2022).

Last week, the US Total Market (Morningstar indices) gained over 3%:

  • Growth stocks gained 3%, value stocks gained 4%. International stocks gained 2% (Morningstar, Aug. 2022).
  • The Aggregate Bond index gained less than 1% (Morningstar, Aug. 2022).
  • Commodities gained almost 5% (Morningstar, Aug. 2022).

YTD Performance Highlights:

  • The US Total Market is down 10%. Did you know that high dividend stocks (DJ US Select Dividend Index) are actually UP nearly 10% over the last year? (Morningstar, Aug. 2022)
  • Growth stocks are down 21%, value stocks are now flat (Morningstar, Aug. 2022)
  • International stocks are down 14% (Morningstar, Aug. 2022)
  • Aggregate Bond index is down 9% (Morningstar, Aug. 2022)
  • Commodities are up 25%. Copper, however, is down 15% over the last year. Many consider this a leading indicator for economic growth (Morningstar, Aug. 2022).

According to Bespoke Investments, the Dollar Index’s streak of closes above its 50-day moving average ended last week (Aug. 2022). It had been the third longest streak of consecutive closes above the 50-day moving average going all the way back to the early 1970s. The only two streaks longer were the 135-trading day streak that ended in January 1973 and the 203-trading day streak that ended in April 2015. What has typically happened to the dollar in the months that followed a break below this key moving average? On average, more losses. All else being equal, this would suggest non-dollar investments should do relatively better.

The Ten-year Treasury yields last week finished at 2.85% (up one basis point over the last week). The range last week was from 2.67% to 2.90% (Yahoo! Finance, Aug. 2022).

Deeper Dive 

From Morningstar’s latest “Mind The Gap” paper published in July:

  • The 1.7-percentage-point gap between investor returns and total returns is more or less in line with the gaps we found for the four previous rolling 10-year periods.
  • The persistent gap between the returns investors actually experience and reported total returns makes cash flow timing one of the most significant factors—along with investment costs and tax efficiency—that can influence an investor’s end results.
  • Our research imparts a few lessons on how investors can avoid these gaps and capture more of their fund investments’ total returns. Investors can improve their results by holding a small number of widely diversified funds, automating routine tasks like rebalancing, avoiding narrower or highly volatile funds, and embracing techniques that put investing on autopilot, such as dollar-cost averaging.

Revisiting the results from July’s OPS Strategist Survey, below are the results of the outlook for six asset classes:

  • OPS Strategists, while not necessarily banging the table bullish, appear to be more bullish on the US stock market than most individual and professional investors
  • They also have a clear preference for US over non-US stocks
  • While basically neutral on investment grade bonds, they also have a clear preference for High Yield bonds
  • The most notable preference of all, however, is for diversification. They are bullish on real assets/commodities, and particularly absolute return alternatives.
OPS Strategist Survey 8/5/22 US Stocks Non-US Stocks US Investment Grade Bonds US High Yield Bonds Absolute Return Alts Commodities
Bullish 43% 21% 21% 50% 57% 50%
Neutral 36% 50% 57% 29% 36% 21%
Bearish 21% 29% 21% 21% 7% 29%

Source: Orion Portfolio Solutions, July 2022

It has been a tough year for investment flows, especially relative to last year, per a LinkedIn post by Callum Thomas of Topdown Charts on Aug. 14, 2022.

Last week’s economic numbers included a couple more data points suggesting “peak inflation.” A peak in inflation is a good thing. Markets like when things start to get better.

  • The Consumer Price Index (CPI) was unchanged in July, below the consensus expected +0.2%. The CPI is up 8.5% from a year ago (First Trust, Aug. 2022).
    • Notably, in the past two months, rental prices for actual tenants have posted the two largest monthly increases since 1987. Rents have been a key driver for inflation in 2022 and should continue to do so in 2023-24 because they make up more than 30% of the overall CPI and still have a long way to go to catch up to home prices (First Trust, Aug. 2022).
  • And even with the July report showing a decline for the first time since April 2020, the producer prices are up a whopping 9.8% over the past year, and core prices are up 7.6% (First Trust, Aug. 2022).

Are we witnessing a peak in inflation or a false peak? The latter would indeed be an important first step to controlling inflation fears. However, according to Research Affiliates in a short video from Aug. 10, due to mechanical (how the month to month calculations work) and structural (how the underlying components are calculated) reasons, it could be a false peak. Their argument is plausible and it’s an argument for diversification – our favorite thing at OPS!

From the latest State Street Global Advisors (SSGA) “Inflation Impact Survey” published Aug. 10:

  • The survey found that with inflation on the rise, over two-thirds of investors (67%) are concerned about our country’s economic outlook over the next 12 months, with over half also expressing concern over market volatility (57%) and the value of their current investments eroding (59%) (SSGA Insights, June 2022).
  • Notably, Generation X is significantly more concerned than Millennials or Boomers about the effects that inflation, the stock market, and economy could have on their personal financial situation (SSGA, Aug. 2022).
  • Nearly half of investors say rising inflation is causing them stress and anxiety (SSGA, Aug. 2022).
  • Majority are changing their spending behavior, cutting back on discretionary expenses including dining out and entertainment (SSGA, Aug. 2022).

According to Strategas, their consumer stress indicator “remains at 23% for the second month despite mortgage rates and gasoline prices falling significantly from June. The CPI release yesterday showed that the food at home component is now growing at 13.1% which offset the decline in the other two components” (Aug. 2022). Again, according to Strategas, when the consumer stress indicator is this high, it’s typically not a great environment for risk assets (Aug. 2022).

Did you know? When it comes to “market-based inflation expectations”, one common method is to compare the difference in yields between TIPS and nominal Treasuries. For example, compare the 5-year TIPS yields to 5-year nominal Treasury yields (fred.stlouisfed.org, Aug. 2022). Recently, when looking at the 5-year break-even, the “breakeven inflation rate” dropped from 3.5% to closer to 2.5%.  That’s great news. One hitch though. Over the last two years, the Fed’s ownership of TIPS moved from 10% over 25%. In other words, this relationship is not quite as “market-based” as it was before. Nonetheless, it’s still a pretty picture for now.

The Atlanta Fed’s GDPNow‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) decreased last week (Aug. 2022). The third-quarter 2022 GDP estimate is now at +2.5% as of Aug. 10, 2022.

This week’s economic schedule from Calculated Risk:

  • Wednesday, August 17 – Retail sales; consensus is for a 0.1% increase
  • Wednesday, August 17 – Fed meeting (FOMC) minutes

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

  • 22Q2 Y/Y earnings are expected to be 9.7% (improvement of 0.5% from last week). Excluding the energy sector, the Y/Y earnings estimate is -0.9% (improvement of -0.6% from last week).
  • Of the 456 companies in the S&P 500 that have reported earnings to date for 22Q2, 77.6% have reported earnings above analyst estimates. This compares to a long-term average of 66.1% and prior four quarter average of 80.6%.
  • During the week of Aug. 15, 20 S&P 500 companies are expected to report quarterly earnings.

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

  • Bitcoin prices rose last week by nearly 5%, briefly breaking through the $25,000 mark. Ethereum screamed towards $2,000, up more than 13% on the week through Sunday afternoon. Cardano, Solana, Dogecoin, and Polygon all added double digit returns. Avalanche (an Ethereum alternative) was up nearly 55% at one point during the week before sliding back to nearly flat (CoinMarket Cap, Aug. 2022)
  • The US government banned citizens from using Tornado Cash (which is a crypto “mixer” designed for anonymity). Coinbase reported Q2 earnings and revealed an over $1 billion loss on low trading volumes. BlackRock announced a spot bitcoin private trust for institutional investors. The final Ethereum testnet before the merge switched over successfully last week (Arcane Research, Aug. 2022).
  • There were no new digital asset ETF launches last week. Brinker Digital Assets jumped nearly 10% on the week (gross). (DeCrypt, Aug. 2022)

Additional Resources  

“The investment industry’s most important role (although many may view it as ancillary to the management of investment portfolios) may be the management of client expectations.” ~ Research Affiliate’s Brent Leadbetter (Aug. 2022).

Last week’s Orion’s The Weighing Machine podcast with Co-CIO Thom Forsha from River Road Capital Management included a discussion about how investing is much more than numbers and trends. It’s more about psychology and temperament. This week on the podcast, we talk to Vanguard’s Colleen Jaconetti about the important topic of retirement spending. Vanguard has done some interesting work in this area and Colleen goes over some key takeaways and potential action items. Speaking of the podcast, the recent interview with AQR’s Dan Villalon regarding diversification, expected returns, and much more was very well received. Thanks for listening.

What clients look for in a financial advisor – from Dr. Daniel Crosby’s Aug. 11 tweet on Twitter (if you don’t follow him already, you should!)

Mark’s Manson’s If Self-Discipline Feels Difficult, Then You’re Doing It Wrong (MM.Net, Aug. 2022).

Harvard Business Review’s In Praise of Extreme Moderation (June 2018).

Another awesome summer picture I found is at Lake Tahoe posted on ShermansTravel.com on Aug. 23, 2013.

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.

 

1487-OPS-8/16/2022

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/.

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).