Market Insights: Last Week in Review with Rusty Vanneman, Vol. 81

Less than one week until Labor Day weekend. Make it count!

The stock market opened lower again Monday morning after last Friday’s and last week’s losses.

  • In short, this week’s losses are fueled by comments from the Fed late last week as  Fed Chair Powell Warns of Some Pain Ahead, where his comments were interpreted to be more hawkish (i.e., more likely to keep raising short-term rates aggressively) than expected.

Regarding year-to-date market return, remember how balanced portfolios, such as the classic 60/40 portfolio, finished last year with some of the best 3- and 5-year gains in US history?

  • Well, at this point, according to BeSpoke Investments, 2022 has been the worst year of the past half century for stocks and bonds combined (BeSpoke, Aug. 2022).
  • For the comparable time of the year, the only years that also have seen both bonds and stocks sitting on a loss through August were 1973, 1974, and 1981; the same applies for government bonds (Morningstar, Aug. 2022).

Ten-year Treasury yields last week finished at 3.05% (up 6 basis points over the last week) (Yahoo! Finance, Aug. 2022). The range last week was from 2.96% to 3.13% (Yahoo! Finance, Aug. 2022).

Deeper Dive 

Good article from Morgan Housel on CollaborativeFund.com on July 6, 2022 about benchmarks: “But I also know there’s a strong natural desire for internal measures – being independent, following your quirky habits, and doing what you want, when you want, with whom you want. That’s what people actually want. Last year I had dinner with a financial advisor who has a client that gets angry when hearing about portfolio returns or benchmarks. None of that matters to the client; All he cares about is whether he has enough money to keep traveling with his wife. That’s his sole benchmark. “Everyone else can stress out about outperforming each other,” he says. “I just like Europe.”

Investor sentiment, which had moderated on the back of recent market gains, moved clearly back to bearish levels again (AAII Investor Sentiment Survey, Aug. 2022). Historically though, when sentiment gets bearish like this, the market tends to produce above-average positive returns in the following 3-, 6- and 12 months (AAII, Aug. 2022).

In the Aug. 2022 OPS Monthly Chart Pack, that can be found at Orion Portfolio Solutions Financial Advisor Success Hub, we see that low-vol (or minimum volatility) stocks are still on sale (at least looking at relative valuations since the beginning of the century).

Interesting info (and from the “learn something new every day category”) from John Auther’s Aug. 18, 2022 article on Bloomberg.com that basically showed investors being late instead of early on investing around a bear-market bottom has worked out more often than not.

  • Richard Bernstein Advisors LLC analyzed the returns of a hypothetical investor around major market bottoms. The returns for entering 100% into stocks “early,” meaning six months prior to a market bottom, were compared with holding nothing but cash until six months after the market bottom and then shifting to 100% stocks “late.” 
  • “Not only does this tend to improve returns while drastically reducing downside potential, but this approach also gives one more time to assess incoming fundamental data,” Dan Suzuki, Richard Bernstein Advisors’ deputy chief investment officer (Aug. 2022).

Despite significant outperformance over the last 12 months, AQR’s Cliff Asness just published that Value Spreads Back to Tech Bubble Highs (AQR, Aug. 2022).

Last week’s economic numbers included New Single Family Home Sales which continued to fall over the last year (First Trust, Aug. 23, 2022). Home prices, however, are still on the rise.

On the Aug. 27, 2022 economic schedule at CalculatedRiskBlog.com: The key report this week is the August employment report on Friday.

  • The consensus is for 280,000 jobs added, and for the unemployment rate to be unchanged at 3.5% (Calculated Risk, Aug. 2022).
  • There were 528,000 jobs added in July, and the unemployment rate was at 3.5% (Calculated Risk, Aug. 2022).

The Atlanta Fed’s GDPNow ‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) decreased last week. The Q3 2022 GDP estimate is at +1.6% (no change from last week) as of Aug. 26, 2022 (GDPNow, Aug. 2022).

First Trust puts out a lot of thought-provoking economic analysis, including this “Distorted” blog article on Aug. 22, 2022 from First Trust’s Chief Economist Brian Wesbury. Key highlights include:

  • Right before COVID started, in February 2020, “real” (inflation-adjusted) consumer spending on services was 64% of all real consumer spending. With the economy locked down, services fell to 59% of spending by March 2021. That five-percentage point decline represented roughly $700 billion of spending. Consumers have clawed some of that back with services now up to 62% of total spending, with big recoveries in health care, recreation, travel, restaurants, bars, and hotels. And, we expect this trend to continue.
  • Home prices soared during COVID, with the national Case-Shiller home price index up a total of 41.4% rate in the past 27 months (through May 2022). That’s the fastest increase for any 27-month period on record, even faster than during the “housing bubble” of the 2000s. Meanwhile, with the government preventing landlords from evicting tenants, rent payments grew unusually slowly during the first eighteen months of COVID. But now rent payments are catching up. Expect a major transition in the next few years, with rents continuing to grow rapidly while home price gains slow to a trickle by late this year and then home prices remain roughly unchanged in the following few years.

As for earnings, second-quarter earnings according to I/B/E/S data from Refinitiv as of Aug. 26, 2022:

  • 22Q2 6Y/Y earnings are expected to be 8.5% (down another 0.3% last week). Excluding the energy sector, the Y/Y earnings estimate is -2.2% (down another 1.3% last week) (Refinitiv, Aug. 2022).
  • Of the 486 companies in the S&P 500 that have reported earnings to date for 22Q2, 78.0% have reported earnings above analyst estimates (Refinitiv, Aug. 2022). This compares to a long-term average of 66.1% and prior four quarter average of 80.6% (Refinitiv, Aug. 2022).
  • During the week of Aug. 29, 10 S&P 500 companies are expected to report quarterly earnings (Refinitiv, Aug. 2022).

Speaking of earnings, Reade Pickert in his Bloomberg article on Aug. 25, 2022, Corporate Profits Soar To Highest Levels Since 1950,“suggesting that the prices charged by businesses are outpacing their increased costs for production and labor.” Wow.

Top question last week was about student loan forgiveness. Let’s have Ben Carlson summarize potential pros and cons of student loan forgiveness (AWealthofCommonSense.com, Aug. 28, 2022). Will it help or hurt the economy? Probably depends on your economic training as contrasted in this classic 7-minute rap video on Keynes vs Hayek (YouTube, Jan. 2010).

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

  • Cryptocurrency prices fell last week after plunging on Friday alongside other risk assets. Bitcoin was higher on the week until early Friday morning, and then was lower by 7% by Sunday afternoon. Bitcoin prices briefly fell below $20,000. Ethereum dropped over 8% to fall below $1,500. Many other major coins fell double digits. (CoinMarketCap.com, Aug. 2022)
  • Jay Powell’s Jackson hole speech on Friday indicating the Fed may be more aggressive than anticipated was the major market mover of the week. The Ethereum merge is now expected to happen on or around September 15. Cardano (8thlargest coin by market cap) will “hard fork” around the same time to upgrade software. It is reported that crypto exchange FTX grew revenues by over 1,000% last year to more than $1 Billion. (Blockworks, Aug. 2022)
  • There were no new Digital Asset ETF launches. The SEC delayed its decision on Van Eck’s Bitcoin ETF application.(Decrypt, Aug. 2022)

Additional Resources  

“The definition of a true partner is someone who shares your level of risk.” Sam Zell (GoodReads, Aug. 2022).

Last week’s Orion’s The Weighing Machine podcast with Kate Guillen from Simplicity Operations Management seems to have been a hit. Kate is an expert on how to use RedTail CRM. I’m guessing this will be a nice resource moving forward. As for this week’s podcast guest, we talk to SSGA’s Max Gold who just happens to be an expert on the gold market! For those advisors/investors interested in gold and real assets, check it out! Thanks for listening!

Here’s a LinkedIn article from one of the nicest and smartest people in our industry, Hussain Zaidi of Budge: “Unpacking Our Paycheck-to-Paycheck Problem”:

  • “The reality is this: Of the 10 people in the room with you, six are living paycheck to paycheck. Even if those 10 people are making $250k+, 25% of them are still struggling to get by. According to a recent Lending Club report, 61% of the United States is living paycheck to paycheck, a statistic that’s increased by 9% since 2021. And while it’s easy to assume that mostly represents the lower income population, 42% of individuals making $100k or more are living paycheck to paycheck, some unable to pay bills comfortably or cover a $400 emergency expense.”

Who makes the best advisors? According to the white paper from 2007 on Academia.Edu, “Morally and Emotionally Competent Financial Advisors Deliver Client Service and Portfolio Performance.”

On that last point, according to think2perform, which offers the Behavioral Financial Advice credential, 87% of investor portfolio growth is due to saving and investing behavior, such as how much to save and staying in the market, instead of investment activities such as market timing, asset allocation, and investment selection (think2perform, Aug. 2022).

Also, according to think2perform regarding their BFA credential and the value of it:

  • 97% of advisors report think2perform’s BFA program increased their production (Aug. 2022)
  • 73% of advisors report think2perform’s BFA program increased their client acquisition (Aug. 2022).

The Experiences That Make People Happiest on DrSamanthaBoardman.bulletin.com from Aug 18, 2022: “Bottom Line: As tempting as it is to retreat, remember that the most uplifting moments of the day come from venturing out into the world.”

Here’s something helpful: 7 Personal Finance Calculators To Use (ThomasKopelman, Aug. 16, 2022).

I hope this isn’t like telling a pitcher they have a no-hitter late in a game, but did you know this could be just the third August since 1961, and the first August since 1997, without a hurricane? According to AccuWeather, the independent forecasting service (Aug. 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.

 

1574-OPS-8/30/2022

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).