Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 8

Good morning, and Happy Monday!  

And Happy Anniversary. It was a year ago that the Great Lockdown Bear Market started. It was a vicious bear market that moved at a historic speed, and one that none of us will ever forget, nor should we. Thankfully, at least from an economic standpoint, there has been a lot of healing since then and more to come. 

In the Markets

The major U.S. stock market indices had slight losses last week, though it should be noted that the average stock outperformed again. In my opinion, it is quite reasonable to expect that the average stock will do better than TV benchmarks moving forward given the strong relative price performance of small cap stocks. Another plus for smaller companies is the expectation that the economy will likely boom in the quarter(s) ahead. Smaller companies tend to be levered to the economic cycle. 

Positive factors for the market include continued good news on COVID-19 (herd immunity in the second quarter now generally expected instead of third quarter for the U.S.), strong corporate and consumer balance sheets (in other words, everyone has a lot of cash to spend) and with strong corporate earnings momentum, it’s not surprising to see GDP expectations for 2021 continue to get adjusted higher. Again, barring some unexpected bad news, we should see the best year for economic growth in over a generation, if not many investors’ lifetimes.

Earnings season just concluded and it was another strong quarter relative to expectations. According to research provider Strategas, “perhaps the untold story the last three quarters during the reporting seasons is that companies have been beating even the highest analyst estimates at a record pace…large spikes in this reading are associated with the beginning of longer-term bull-markets.”1 And let’s not forget that money supply growth is a whopping 25% year-over-year and that the Federal Reserve’s balance sheet has expanded 70% since about  year ago. That means there is a lot of liquidity looking for a home, which should be good for the markets, economic growth, but at the risk of higher inflation.

Government stimulus is also a big near-term plus, with federal spending at 40% of GDP and the federal deficit at 20% of GDP. Again, all else being equal, this should be good for near-term growth, but again with the risk of longer-term inflation.  

What Investors Should Look For 

Since I mentioned inflation, the market seems to be factoring this in as 10-year yields continue to rise, now approaching 1.40%. In turn, the 10-year inflation break-even rate between TIPs’ (Treasury Inflation Linked Bonds) yields and nominal Treasuries is now basically at 2013/14 levels.  If it pushes through these levels, it will be pushing to its highest levels since at least 2003 (that’s as far back as the chart from Bespoke had data). TIPs were introduced in 1997.  

The break-even rate is yet another indication of a potential “inflation scare” in the months ahead, especially once the poor inflation numbers from nearly a year ago drop off the year-over-year calculations.  In other words, headline inflation numbers will hit their highest levels in years.  Since last May, annualized CPI is already at 4.1%2, which is more than twice the official Fed target.

Rising yields is also why the yield curve (i.e., the difference in yields between long-term bond and short-term bonds) continues to steepen (i.e., rise). Typically speaking, a steeper yield curve is good for financial stocks (they can make more on their loans, for instance) and value stocks in general. 

Speaking of value stocks, did you know that Growth stocks are generally considered growth stocks because they have superior growth rates (and higher valuations) than value stocks? I bet you did, but did you also know that according to Strategas that value stocks are currently expected to grow faster than growth stocks in both 2021 (57% vs 28%) and 2022 (15% vs 12%)3. You don’t see that very often. 

One more thing about rising interest rates and their impact on stock prices.  First, there is already a lot of recent analysis out there why this could be a negative for stocks, but there is also plenty saying it won’t be an issue, at least until yields get much higher.   From where I sit, it does matter.  It impacts the value of future cash flows, and it impacts highly valued stocks more.  One recent example is when rates rose in late 2018.  At that time the overall U.S. market dropped nearly 20%, and it was the richly valued large cap tech growth names that led the way lower.   It made sense then, and it makes sense moving forward. 

I love globally diversified portfolios, and I generally believe that real assets deserve consideration in long-term portfolio in addition to traditional stocks and bonds. Given that commodities have started to perform well, that time might be now. As research firm Strategas points out, commodities move in cycles historically and could now be at the beginning of an uptrend.4 Reasons why? “The likelihood of higher inflation in the future, the fact that investors are generally underweight commodities, and the relative cheapness compared to other asset classes are all reasons why we could be in the early stages of a commodity boom.” Commodities are indeed at their lowest relative value to stocks in 30 years.  


Bitcoin prices are on fire.  Canada just introduced an ETF a few weeks ago and it’s raising assets like crazy.  It’s hard to imagine we won’t see a crypto ETF in the U.S. soon, especially since the current fund options in the U.S. trade at wide premiums to net asset value and have high expense ratios.   What’s also interesting about Bitcoin and all crypto, is that since their prices exploded higher mid-year last year, gold prices have gone nowhere.   Maybe there is something to the notion that Bitcoin is treated like “Gold 2.0” to some investors? What happens to gold prices if a Bitcoin ETF is introduced?   

There is a saying that amateur investors act on emotion and professional investors on numbers, and there might be some truth to that, but more and more institutional investors are getting interested and informed on crypto.  

Upcoming Economic Data 

Key economic reports this week include a lot of housing data (which, by the way, the housing sector has been on fire) and the 2nd estimate of 4Q GDP.  Federal Reserve Chair Jerome Powell is also speaking. I generally consider Fedspeak noise, but there’s a lot of interesting stuff going on in the economy and markets and Powell’s comments could be informative.  

Last week, I mentioned how the 1-year relative performance numbers will start to change rather dramatically. I’m saying it again, as I believe that this will likely put money in motion by some momentum investors. It will also likely change some of the market narratives and questions investors are asking.  

Commentary and College Basketball 

I mentioned NYU marketing prof Scott Galloway last week, but I have to do it again because his latest Friday commentary should hit a button for all financial advisors, and how we can positively impact people’s lives.

In college basketball, #1 Gonzaga and #2 Baylor (Go Bears!) remain undefeated. The next three highest-rated teams are from the Big 10 (best college basketball conference ever?). The Big 10 is tough – a reason why my home state Huskers have won only one conference game over the last two seasons. 

Have a great week! For more insights and commentary, visit our Financial Advisor Success Hub.

1 Strategas Daily Macro Brief, as of 2/17/21
2 Bureau of Labor Statistics, as of 2/10/21
3 Strategas February Asset Allocation Update, as of 2/18/21
4 Strategas Daily Macro Brief, as of 2/22/21

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About Rusty Vanneman, CFA, CMT, BFA
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 weekly podcast, Orion’s monthly Weighing the Risk podcast, and authored the book “Higher Calling: A Guide to Helping Investors Achieve Their Goals.” Rusty has 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.* 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). He is also a Behavioral Financial Advisor (BFA). *RUSTY VANNEMAN MONEY MANAGEMENT EXECUTIVE AWARD. Rusty Vanneman, CFA, CMT, was selected as a “Top 10 Fund Managers to Watch” in 2017 by Money Management Executive. Money Management Executive is an unbiased, third-party publication covering the asset management industry. Money Management Executive chose the list of managers to watch by screening Morningstar data from funds with a single manager, ranked as having the best three-year annualized returns in their respective categories. The list of managers was published March 27, 2017. Money Management Executive is not affiliated with OPS. Ratings and awards may not be representative of any one client’s experience and are not indicative of OPS’s future performance.