Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 59

• Global markets started the week off on the wrong side of the bed.  One leading reason is that crude oil prices are now over $130/barrel. Their highest levels since 2008.
  • Gas prices have surged to their highest level since 2008, with the national average now hitting $4.06 a gallon, according to AAA.
• Last week the US market indices were essentially lower by 1-2%; developed international stocks were down 6-7%; and, emerging markets down about 2% in the aggregate.
• The S&P 500 is now in “correction” status (down over 10% from highs).   Some European markets are now in bear markets (down over 20% from market highs).
• For the year, the US market (Russell 3000) is down nearly 10%, but, notably, high dividend stocks are up over 2% for the year.
• Though value has been outperforming of late (by over 11% year-to-date), it’s been more about the energy sector doing well. Financials are lagging, especially with the yield curve (for example the difference in yield between 10-year and 2-year Treasuries) getting “flatter” (gap in yields getting narrower).   Financials perform better, all else being equal, when yield curves get wider (given they borrow short, such as the amount they pay you on savings and lend longer, the rate you pay on your mortgage).
• Commodities have been doing well this year.  The aggregate index is up over 28%.  Crude oil is up over 50%.   Notable is that gold broke the $2,000 an ounce barrier overnight. The last time it did that was August of 2020.
• What an incredible week for bond market volatility, but in the end, Ten Year Treasury Yields dropped over ¼ of 1% to close at 1.72%.
• Great employment report Friday.  The short-term stock market negative is that it might/should make the Fed more aggressive in fighting inflation, but it’s still a good sign for our economy.   Let’s look at some of the highlights:
  • Nonfarm payrolls increased 678,000 in February, well above the consensus expected 423,000.
  • The unemployment rate fell to 3.8% in February from 4.0% in January.
  • Average hourly earnings (unchanged or month) are up 5.1% versus a year ago.
  • Aggregate hours rose 0.8% in February and are up 5.5% from a year ago.
  • Meanwhile, the share of unemployed who decided to quit their prior job hit 15.1%, tying the highest level in the past twenty years.
• Regretfully, the current estimate for 1Q22 GDP continues to drop.  According to GDPNow, it is now 0.0%, down from 0.6% the week before.
• While geopolitical news will likely drive the market, this week’s economic calendar shows the top economic release will be Thursday’s CPI number:
  • Consumer Price Index (CPI) for February consensus is for a 0.8% increase in CPI and a 0.5% increase in core CPI.  The consensus is for CPI to be up 7.9% year-over-year (YoY), and core CPI to be up 6.4% YoY.
• While earnings growth for the 4Q21 earnings season was over 30% for the 4th straight quarter, the current estimate for 1st quarter earnings growth in 1Q22 is less than 5% according to the weekly Factset Earnings Report:
  • If 4.8% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate for the index since Q4 2020 (3.8%).
  • Earnings Revisions: On December 31, the estimated earnings growth rate for Q1 2022 was 5.9%.
• Some liked the weekly and concise COVID Tracker from Chicago-based investment firm First Trust. They just announced their final version, which is 2 pages, but as always it’s all graphics and thought-provoking.  Most importantly for investors, we can hopefully put COVID in the rear-view mirror and we can begin to heal both literally and figuratively.
• Triumph of the Optimists is the one book I always recommend as the best financial advisor office lobby book.  In short, it’s why we believe that to build and maintain wealth, one needs to invest and stay invested. Optimism wins over time.
  • Well, each year about this time Credit Suisse essentially provides a free update to its Global Investment Returns Yearbook. In short, it’s great.  The front end of the annual update has some academic-ish articles, but then there are the one-pagers on each major stock market around the world showing their market history.  Below are some highlights:
    • Equities have performed best over the long run. Over the last 122 years, global equities have provided an annualized real USD return of 5.3% versus 2.0% for bonds and 0.7% for bills.
    • Equities have outperformed bonds, bills, and inflation in all 35 markets.
    • Prospectively, the authors estimate that the equity risk premium will be around 3½%, a little below the historical figure of 4.6%.
    • With a 3½% premium, equity investors would still expect to double their money relative to short-term government bills in 20 years.
    • Historically, diversification across stocks, countries, and assets has greatly improved the return-risk tradeoff.
• Another solid Ben Carlson Wealth of Common Sense article called “There is No Hedge for Everything” is loaded with potential talking points, including that while inflation isn’t a tailwind for stock market returns, it’s also NOT a reason to abandon the stock market given the historical experience of positive returns.
• The  AAII Investor Sentiment Survey isn’t quite as negative as it was, but it’s still net bearish.  Historically speaking, that’s been a net plus pre-condition for above-average gains in the stock market in the months ahead.   Again, the last few weeks have seen some of the most negative numbers since April 2013, nearly 9 years ago. 
• There is what people say and what people do.   And while overall equity allocations do indeed remain near all-time highs, risk assets flows (according to Bank of America ) are at their strongest outflows since April 2020.
• That said, according to Goldman Sachs, ETF flows remain strongly in positive inflows for the year (Goldman Sachs, US ETFs: This Week in ETFs (3.5.22)). Highlights from GS on flows:
  • Value funds in net inflows; growth funds in net outflows
  • Regarding inflows, after value funds, the hot sellers are commodity funds and government bond funds.
  • Regarding outflows, after growth funds, the categories with the worst YTD outflows are high yield and corporate bonds.

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

• Although you wouldn’t know it by the ending returns, it has been a wild week in crypto prices. As of Sunday afternoon, Bitcoin is still nearly 1% higher on the week (just under $39k), Ethereum and Cardano down -3%, Avalanche -2%, and Solana -1%. The Terra blockchain’s LUNA token continues to be strong, up nearly 9% on the week. Bitcoin was as high as $45k on Tuesday.
• Ukraine had planned an “airdrop” to thank all who’ve contributed crypto donations (over $50mm now), but that was canceled. There was chatter on banning Russian users from cryptocurrency exchanges, but that was quickly declined citing the effects on ordinary Russian citizens. The Treasury department is heightening the tracking of cryptocurrencies to ensure they are not being used to avoid sanctions.
• The big digital asset ETF news of the week was Schwab filing for a crypto economy ETF. While ETFs focused on companies in the cryptocurrency space are not a new thing, it is for Schwab. Traditionally, Schwab has been slow and meticulous on product launches, focusing on major vanilla asset classes and minimizing costs (they don’t even have a high yield bond ETF, for example). Schwab’s interest along with others is a nice stamp of approval.

Additional Resources

• This week on Orion’s The Weighing Machine podcast is Eben Burr, the president of Toews Asset Management.  Some say that Eben is the coolest president in the asset management profession, and I would agree that he’s definitely on the shortlist for that consideration.  Hear a lot of good stuff, including commentary on Jeremy Grantham’s “superbubble call”, how to potentially hedge equity portfolio, and blast beats!
• “Make your point and get out of the way.” Morgan Housel
  • More tidbits from this article might help you not feel as guilty about the big stack of unread books on your nightstand:
    • The average online reader makes it no more than 50% of the way through an article.
    • Kindle ebook data to show that a 60% completion rate is about as good as it gets for books. Less than 20% is common, even for best-sellers.
• Speaking of Morgan Housel, here is a Tim Ferriss interview.  Tim Ferriss is one of the top podcasters around.  And while Orion is truly lucky to have a great behavioral finance expert in Dr. Daniel Crosby, Morgan Housel is also truly outstanding. This interview is 3 hours long! I will listen to it this coming week.
• Who is the best Batman ever?  That is a popular question these days given the big splash release of the latest Batman movie this weekend.  I haven’t seen it yet, but I’m a sucker for rain-soaked and neon-stained cinematography. Oh, and the best Batman IMO is Christian Bale (Michael Keaton is also great).
• Speaking of movies, this is more for the arthouse crowd, was this movie called Atlantis, which came out in 2019. It was considered sci-fi.  It’s about Ukraine after being attacked by Russia.  Sounds like viewers either love it or hate it according to the reviews.
• This website 14-years-of-brain-pickings contains a lot of awe-inspiring nuggets including a review of Yes to life! by Victor Frankl.
• Thanks for reading and have a great week!  For more resources, please check out the Financial Advisor Success Hub, and as always, please let us know what we can do better at rusty@orion.com or ben.vaske@orion.com.

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/.

“The CAIA® is the globally-recognized credential for professionals managing, analyzing, distributing, or regulating alternative investments. To learn more about the CAIA, visit https://caia.org/.”

0437-OPS-3/10/2022