Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 26

Happy Tuesday! Hope you had a happy and safe 4th of July weekend.

With a gain of just more than 1% in the closing week of June, the quarter ended up a solid win for investors. The U.S. stock market gained more than 8% for the quarter after climbing just under 3% in June. The U.S. market is now up nearly 15% for the year and more than 43% for the last 12 months.

It has indeed been an amazing year: strong gains and nothing more than a 5% pullback from the highs. This is rare. According to Bespoke Investments, over the last 25 years, the only other year that saw such steadiness in the first half of trading was 2017. And in the S&P 500’s history, there have only been 14 other years when the largest pullback through the first six months was less than 5%. And here’s the good part: Of those 14 years, the S&P 500 tended to see positive returns in the second half with gains in 13 of the 14 years for a median gain of 10%+. 

Here’s another good point from BeSpoke. Since 1945, the market has had 23 first-half gains of 10% or more. In those years, the median return from the market in the following six months also averaged a 10% gain, and gains were generated 80% of the time. Bottom line: history shows, Strength begets strength.

In the same vein of amazing years, commodities also posted another positive month, gaining just less than 2% in June. The Bloomberg Commodity Index gained more than 13% for the second quarter and is up more than 21% for the year. However, lumber prices saw their eighth straight week of declines last week. Since the peak price on May 7, 2021, lumber prices have now fallen by 56%. The 45% drop in the last month has represented the greatest one-month decline since 1978. Commodity prices have been driven higher by energy and agricultural prices. 

Arguably the most important economic release each month came out last Friday. Here are highlights from First Trust’s Brian Wesbury regarding the June employment report:

  • Very good headline for job growth, but the details for June were not as strong. 
  • Nonfarm payrolls rose 850,000 in June, beating the consensus expected 720,000.
  • Civilian employment, an alternative measure of jobs that includes small business start-ups, declined 18,000 in June, which helped push the unemployment rate up to 5.9%.
  • Compared to February 2020 (the last pre-COVID month), average hourly earnings are up 6.6%, while total hours worked are down 3.7%. 
  • Notably, 942,000 people quit their last job and are still looking for a new one, which is the highest level since 2016 and signals confidence in the future of the labor market. 
  • Right now, we are still 6.8 million jobs short of where we were pre-COVID.
  • The U.S. labor market has a long way to go for a full recovery, but it is on track.

As mentioned last week, the Case-Shiller Home Price Index study was released for April 2021 on Tuesday. The annual gain of nearly 15% as of April represents the 11th straight month of increases, as well as the highest reading in the last 30 years of home price data. Although the West and Southwest displayed the largest gains, all measured regions increased by double digits. You can view the full report here.

Investors should watch the corporate bond markets for potential indicators of stock market weakness. In recent decades, corporate credit spreads have been an excellent warning system for the stock market. According to research firm Strategas, high-yield spreads are now at their lowest point since May 2007, closing the first half at 268 basis points. That means investors get paid 2.68% more on average, owning high-yield bonds over risk-free (at least in terms of credit risk) Treasury bonds. If the markets see another 35 bps of compression in spreads, that will reach a new low. 

News like this has something for everybody, and what you take from it depends on whether you see things half full or half empty. If you’re in the latter camp, this means investor sentiment is quite bullish and setting the stage for disappointment and financial blood in the streets. It’s the classic case of picking up nickels in front of a steamroller. If you generally see your cups half full or more, the fact that spreads continue to get tighter is an unequivocal positive for risk assets in the near-term. Another positive that should be noted is aggregate corporate interest rate paid is at the lowest level since the middle of the 20th century. No reason to drive fast yet; the traffic light remains green.

Robinhood filed for an IPO last week, despite receiving the largest fine that FINRA has ever issued in the same week. Many are asking whether or not Robinhood and the gamification of markets is good or bad for investors and financial advisors. It’s a worthy debate, but I still lean toward it being more of a positive than a negative. New investors are enthusiastically coming into the markets. I believe to reach long-term goals, such as generating sufficient retirement income, more people need to invest. 

Many of these investors will seek out advice. I know from experience. Earlier in my career, I worked for investment firms that primarily serviced self-directed investors, but eventually many of those investors became clients in our firm’s globally diversified portfolios, and they stayed clients for many years. For a great read on Robinhood that you will either love or hate — from an author you will also love or hate (and I bet you’ve already decided) — check out Professor Scott Galloway’s “Robinhood and iAddiction.”

Last week I came across a few great studies for financial advisors that again show the tremendous value of financial planning advice. This came from a solid (and short) daily email from the self-described “grumpy German” Joachim Klement. Using Klement’s words: 

Already a decade ago, one of the most important papers on financial planning was published by Annamaria Lusardi and Olivia Mitchel. They looked at the type of planning individuals engaged in and how that influenced their net worth at retirement. They distinguished between non-planners, simple planners (people who roughly knew how much of their income to save each month or each year), serious planners (people who have a proper financial plan) and successful planners (people who have a financial plan in place and managed to stick to it throughout their career, aka fairies, unicorns, and otherwise unimaginably disciplined investors). …just moving from non-planners to a simple planning exercise increases net wealth at retirement by a factor of two to three. Engaging in serious planning then adds another 25% to 35% in extra wealth at retirement. This is where the true value of financial planning lies and where advisers really add value: Making investors aware that they need to save, how much they need to save, and how best to manage their income and expenses to achieve their savings goals. Everything else is just noise.”

OK, let’s get noisy. The bullish outlook for the stock market remains intact. The economy is getting better, the Federal Reserve is incredibly supportive (“Don’t Fight the Fed”), and the market’s price trend is bullish (“Don’t Fight the Tape”).

Currently, I personally think the market’s two biggest potential storm clouds are peak growth and investor expectations. Regarding the former, economic growth rates are likely to peak soon. Growth afterward should still be well above-average, but the official growth rate may be worse. “It’s the trend, not the level” of data that drives markets, according to one of the great market analysts, Ned Davis Research.

As for the latter storm cloud, a recent study by Natixis showed that U.S. individual investors now expect stock market returns of 17.5% after inflation. As advisors, we prefer to see optimism by investors, but since the long-term return from stocks is half that, advisors will most likely need to start managing investor expectations lower to make sure they have good investing experiences.  

The next episode of Orion’s Weighing Machine to be published this week features technical analyst Dave Lundgren. Dave has worked and rubbed shoulders with the biggest and brightest technical analysts and portfolio managers in the industry. Heck, he is one of them! 

Did you know? Since Mississippi State won the College World Series last week, the last two schools from Power 5 NCAA conferences that have never won a national championship in a team sport are Kansas State and Virginia Tech.

For more resources on the economy and markets, including partner content, please review the Orion Portfolio Solutions Financial Advisor Success Hub.

As always, please let me know if you have any feedback or questions. You can reach me at rusty@orion.com. You can also reach out to benjamin.vaske@orion.com

Have a great week!

1956-OPS-7/6/2021

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).