Weekly Market Bullets with Rusty Vanneman, CFA, CMT, BFA, Vol. 100

Welcome to our 100^th (at least since we’ve been counting!) Weekly Market Bullets blog post!

Thanks to last Friday’s employment report, we have a lot of green to start the years in terms of market returns. The S&P 500 is up a bit over 1%, but diversified portfolios are doing even better.

• Small caps are outperforming large caps so far this year, value stocks are beating growth stocks, international stocks are beating domestic stocks (Morningstar, Jan. 2023).
• Bonds are off to a nice start, up over 1%; high yield bonds are up over 2% (Morningstar, Jan. 2023).
• Hard to find losses, though health care and Japan have slight YTD losses (Morningstar, Jan. 2023).
• One asset class that is down is commodities, particularly with oil prices down over 8% (Morningstar, Jan. 2023). That said, it’s interesting to note that gold is up over 2% so far this year (Morningstar, Jan. 2023).

Last Friday’s employment report was a pleasant surprise – labor growth was stronger than expected and wage growth (inflationary pressures) was lower than expected (CNBC, Jan. 2023). Bonds and stocks both really liked the news (CNBC, Jan. 2023).

Here is where key interest rates ended up last week:

• Last week Ten-year Treasury yields finished at 3.57%  (down 31 basis points for the week) (Yahoo Finance, Jan. 2023).
• The yield to maturity on the Bloomberg Aggregate Bond Index ended last week at 4.53% (down 21 basis points) (Bloomberg, Jan. 2023).
• The average money market yield finished at 4.06% (up 1 basis point) (Crane Data, Jan. 2023).
• The average 30-year fixed mortgage rate moved lower last week to 6.52% (down 7 basis points) (Bankrate, Jan. 2023). Funny how fast mortgage rates move up with Treasury interest rates, but they’re a lot stickier when Treasury yields fall.
• The next Federal Open Market Committee (FOMC) meeting isn’t until February 1 but, as of now, according to the CME FedWatch Tool, the market considers about a two-thirds chance we will see a 25 basis point increase to Fed Funds and a one-third chance we see a 50 basis point increase (CME Group, Jan. 2023).

Deeper Dive

We wrote about this a lot last year, but the market conditions were good for active managers, as the “average stock” beat the “top of the market” (i.e., the biggest market caps) (Strategas, Jan. 2023). According to Strategas:

• “Our universe of large cap core managers shows that 62% beat the S&P 500 in 2022. This was the highest percentage since 2005 when 66% exceeded the S&P 500. The fact that many managers simply do not hold the top 5 companies at the same weight as the index has been accretive to portfolio performance.” (Strategas, Jan. 2023)
• “As a firm, we believe that the average stock will outperform the top of the market moving forward. The last stretch of consistent relative outperformance from the equal-weight S&P 500 relative to the cap-weighted S&P 500 was post the Dot-Com bubble bust. In our view, stock pickers will have the opportunity to outperform given what we believe to be durable trend changes in a post-pandemic world for inflation, monetary policy, and globalization.” (Strategas, Jan. 2023)

It might have been a tough year for investment flows throughout the industry, but not for ETFs as they had their second best year ever according to this “ETFs in Pictures 2022” article in The ETF Educator on December 30, 2022.

Expect that growth to continue for ETFs according to predictions in “5 ETF Predictions for 2023” from The ETF Educator on January 4, 2023:

• “While ETFs have been around for nearly three decades, it feels as though the industry is still accelerating.  In 2022, the S&P 500 was down over 18%, US broad bonds experienced a historic 13% loss, and nearly every other major asset class was in the red.  Despite that, ETFs still posted around $600 billion in inflows – their second-best year ever.  In 2021, ETFs knocked on the door of $1 trillion with over $900 billion in inflows.  I predict 2023 will be the year ETF inflows surpass $1 trillion for the first time.” 
• “I suspect there may also be elevated flows into international equity ETFs (in anticipation of a weaker dollar), along with alternative ETFs (as investors contemplate the death of the 60/40 portfolio).  I expect physical gold ETFs (more on these in a moment), commodity ETFs, managed futures ETFs, and the like to continue drawing interest.  All of this will be enough to push total ETF flows past $1 trillion. The bottom line is that there’s been a format change.  While it’s been going on for a while, I think we’ll look back on 2022 as the year mutual funds formally passed the baton to ETFs.  There was something like a $1.6 trillion dollar gap between ETF inflows and mutual fund outflows last year, which was a record.  The mutual fund is now dying as an investment vehicle.  The time of the ETF has arrived.”

Speaking of ETFs, check out the “ETF Global Outlook Report” for January 2023 at eftexpress.com, which includes comments from Brinker Capital’s Grant Engelbart.

Investment consultants are advising their institutional clients to prepare for long-term inflation by upping their exposure to fixed income, alternative investments and active managers in 2023, according to a January 3, 2023 article by Sam Heller in FundFire:

• “Building more diversified and resilient portfolios is going to be even more important than it has been, as we don’t necessarily have the easy monetary environment that we’ve seen prior to 2022.”

Earnings season is quickly approaching.

• Strategas: Sales Growth For 2023 Expected To Be Very Underwhelming
  • “Last year, multiple compression played a significant role in the equity market decline and this year we believe fundamentals will play a greater role in equity returns. The consensus believes sales will grow about 2.5% this year, with the sales estimate only revised down -1.5% from its high back in June. With household energy and food costs still elevated, discretionary spending will likely suffer weighing further on the sales outlook for the S&P 500.” (Strategas, Jan. 2023)
• Strategas: Earnings Growth Also Continues To Slide, Now Expected To Be Below 5%
  • “For 2023, the consensus continues to believe that earnings will grow roughly 4.5% with current expectations for 2023 EPS to be about $230. We have been of the view for some time that this figure remains high and will be lowered. Our estimate remains at $200 for the year which would mean earnings are set to decline by -10%. From our perspective, 2023 may be another challenging year for equities overall.” (Strategas, Jan. 2023)

Over the last few years, we’ve often written “…not since WWII.” Well, here’s another one. Money supply growth has dropped the most since WWII and is in negative territory (Bloomberg, Jan. 2023). All else being equal, this is something that favors the Fed pivoting sooner than later (Bloomberg, Jan. 2023). First, it means that inflation pressures should significantly drop (Bloomberg, Jan. 2023). Second, however, it also does raise the chance of a credit event when there’s not as much liquidity sloshing around in the system (Bloomberg, Jan. 2023).

As for key data last week, the highlight was Friday’s Non-farm payroll data from First Trust’s January 6, 2023 “December Employment Report”:

• Non-farm payrolls increased 223,000 in December, beating the consensus expected 203,000 (First Trust, Jan. 2023).
• The unemployment rate declined to 3.5% from 3.6% in November (First Trust, Jan. 2023).
• Average hourly earnings – cash earnings, excluding irregular bonuses/commissions and fringe benefits – rose 0.3% in December and are up 4.6% versus a year ago (First Trust, Jan. 2023).
• Aggregate hours declined 0.1% in December but are up 1.9% from a year ago (First Trust, Jan. 2023).

With 4.50 million jobs added, 2022 was the second best year for job growth in US history behind only 2021 with 6.74 million (Calculated Risk, Jan. 2023).

The employment report last week surprised to the upside for the ninth consecutive month (Calculated Risk, Jan. 2023). That’s the longest positive surprise streak this century (Calculated Risk, Jan. 2023).

Another report last week, however, was disappointing. “December ISM Non-Manufacturing Index” from First Trust on January 6, 2023: The ISM Non-Manufacturing index dropped to 49.6 in December, well below the consensus expected 55.0 (levels above 50 signal expansion; levels below signal contraction) (First Trust, Jan. 2023).

On the economic calendar this week, we will get the consumer price index for December on Thursday (Calculated Risk, Jan. 2023). Other reports due next week include inflation expectations from the New York Fed on Monday and the import price index for December on Friday (Y Charts, Jan. 2023).

Atlanta Fed’s GDPNow improved last week to 3.8% for expected growth in the fourth quarter of 2022. Again, the economy continues to show more positive momentum than most seem to think (GDPNow, Jan. 2023).

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

• Cryptocurrencies showed some signs of life last week. Bitcoin climbed 3.4%, back above $17,000 (CoinMarketCap, Jan. 2023). Ethereum jumped almost 8% to near $1,300 (CoinMarketCap, Jan. 2023). Many other smaller coins had strong weeks. Solana – which ended 2022 down nearly -95% as FTX collateral damage, screamed 50% on the week – 16% of that on Sunday night (Decrypt, Jan. 2023).
• Sam Bankman-Fried pleaded not guilty to all criminal charges related to FTX (CoinMarketCap, Jan. 2023). Silvergate bank – a major lender to the crypto industry and publicly traded company – announced more than $8 billion of customer withdrawals and a substantial loss in selling securities to meet those withdrawals (CoinMarketCap, Jan. 2023); the stock tumbled -42% on Thursday. Coinbase reached a $100 million settlement over AML practices (CoinMarketCap, Jan. 2023). In better news, Bitcoin celebrated its 14^thanniversary on Tuesday, it is up 1,690,706,971% since (Bloomberg, Jan. 2023).
• Rival fund sponsor Valkyrie unveiled a proposal to take over management of the behemoth GBTC (ETF.com, Jan. 2023). The parent company of Grayscale, Digital Currency Group, is dealing with issues related to many of its subsidiaries, and Valkyrie sees this as an opportunity (that most consider a long shot) (ETF.com, Jan. 2023).

Additional Resources

“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.” — Charlie Munger, Vice Chairman of Berkshire Hathaway (GoodReads, Jan. 2023).

Looking for book ideas? Check out some titles from Polen Capital’s Book Club.

Investment News 2022 global survey of 2,250 financial professionals has key findings including:

• 33% of wealth customers changed providers within the last 12 months (Investment News, Jan. 2023).
• Customers who switched providers cited the digital interface as the primary reason (Investment News, Jan. 2023).

On this week’s Orion’s The Weighing Machine podcast we talk to repeat guest Kim Arthur from Main Management. Kim’s prior podcasts have been very popular (especially his Weighing the Risks episode on geopolitical risks). Kim shares his 2023 outlook with Robyn and I, and it’s worth a listen given that Kim’s outlooks have been strong in recent years.

Don’t miss Orion’s Ascent conference. The goal of Ascent 2023 is to give advisors the tools they need to lean into change and embrace innovation, disrupt the status quo and ultimately win for themselves and their clients.

• WHEN: February 27 – March 2, 2023
• WHERE: Orlando World Center Marriott
• HOW: Registration ends January 31

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.

For financial advisors to get this commentary delivered straight to your inbox, please subscribe at www.orionportfoliosolutions.com/blog.

0058-OPS-1/10/2023

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/.

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/.