Tuesday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 21

Happy Tuesday. Hope you had a wonderful and safe holiday weekend. 

Markets Update

Thanks to gains to finish the month last week, the overall U.S. stock market ended May with a small gain of less than 1%. For the quarter, the overall market is now up nearly 6%. Growth outperformed value last week, but it trails in returns for May, YTD, and the last 12 months.

For the year, the market is now up over 12%. The one-year return is still an impressive 43%. U.S. small caps are up 16% YTD and 61% over the last year.

Deeper Dive

The real excitement in the markets to close out the month were in the “meme” stocks, including GameStop (GME) and AMC (AMC), as they witnessed sharp gains in price, market volume, and financial headlines. In my opinion, it’s hard to imagine how these gains stick long-term given the underlying fundamentals of the stocks, but it’s exciting that more investors are getting engaged with the markets. Investors can’t build wealth without investing, and new investors coming into the markets provide more opportunities for financial advisors to help educate them about the benefits of long-term diversified portfolios.

Despite the enthusiasm for the meme stocks, overall investor sentiment remains fairly calm. Depending on how one cuts the sentiment data, it could be argued that the sentiment backdrop for the stock market is the most supportive it has been in many months. While I wouldn’t quite qualify it as a “wall of worry,” I would say it’s definitely not overly bullish either. 

I believe the stock market outlook remains positive because of two primary factors: 1) the economy is getting better and 2) the overall monetary and fiscal support for the economy and markets remains the strongest it has been since the 1940s. Big picture, almost everything else is noise at this point, although there are things to be watching for, such as inflation. 

Inflation

Actual inflation data and expectations continue to surprise to the upside, although the markets are currently appearing to side with the Federal Reserve that “inflation is transitory” for the time being. As for actual inflation data, personal consumer expenditures (PCE) rose a faster-than-expected 3.1% in April, beating estimates of 2.9% after rising 1.9% in March. This was the biggest jump in this index since 1992

Over the past month, core PCE rose 0.7%, which was also quicker than the expected 0.6%. Including volatile food and energy prices, the headline PCE index jumped 3.6% year-over-year and 0.6% from March. As for inflation expectations, 83% of Americans are now tightening their belts due to inflation concerns.

Despite the higher inflation readings, the 10-year Treasury yield moved higher for the month, ending at 1.58%. It was 1.65% at the end of April. It closed at 1.74% at the end of March. This is notable, as the bond market is often considered the “smart money” or the “worried money,” and the bond market is not acting like inflation is going to get out of hand.

Cryptocurrency

Bitcoin had another volatile and net-losing week to close out May. For the month, Bitcoin lost nearly 40%.  As of this writing, it is $36,000. 

Upcoming Economic Data

The economic calendar this week features the all-important employment report for May. While employment data is a lagging economic indicator, it’s important because it’s a key factor for driving Fed policy. The consensus for the upcoming report is for 650,000 jobs added and for the unemployment rate to decrease to 5.9%. There were 266,000 jobs added in April, and the unemployment rate was at 6.1%.

More Resources 

A recent article reminded me of the wisdom of an investing great, Peter Lynch. Years ago, I worked at Fidelity Investments in Boston in their investment unit, FMR Co. It was a few years after Lynch retired from running the largest fund in the industry, the Magellan Fund, though he could still be found in the Fido hallways. Years later, I co-managed a hedge fund that invested in former Fidelity portfolio managers. 

In both experiences, the lessons and stories of Lynch were vital to understanding the culture and mindset of these money managers. The article posted a transcript of a 1990 interview with Peter Lynch discussing common investor mistakes. To me, the key lessons are: To build wealth, we need to invest (and be patient); don’t forecast or “play” the market; and the investor who “turns over the most rocks” will do better over time; and if we can’t do that, we should hire investment managers who have the resources to dynamically and actively manage portfolios. 

Speaking of good articles, it’s hard to beat Jason Zweig’s weekly words of wisdom for all investors. In last week’s article, he wrote how our economic decision-making is far less consistent than we think it is. Investors need to recognize that and work to counter it.   

For fans of thematic investing, the latest episode of Orion’s Weighing Machine features Jay Jacobs and Tom Driscoll from Global X, a leading ETF provider and thematic investing strategist.

For more resources on the economy and markets, including partner content, please review the OPS 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. Have a great week!

 

1768-OPS-6/1/2021

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).