Weekly Market Bullets with Rusty Vanneman, CFA, CMT, BFA, Vol. 96

In the closing weeks of what has been another remarkable year, it would not be surprising to see more big moves in the markets, up and down – lower volumes due to the upcoming holidays could be one reason. Some market activity will also be driven by tax-loss selling (i.e., selling positions with unrealized losses which, in turn, can be realized and used to offset realized gains from other positions), which is a good reminder to review your own taxable investment accounts for opportunities to lower your tax bill.

Another big week coming with the Fed meeting on Wednesday and key inflation Consumer Price Index (CPI) data on Tuesday (Calculated Risk, Dec. 2022). On the latter, expect headline CPI to be still above 7%, while core CPI (ex: food and energy) will be closer to 6% (Calculated Risk, Dec. 2022). Regarding the Fed, it is expected that they will raise rates 50 basis points, though some think there’s still a chance of 75 (Calculated Risk, Dec. 2022).

If the Federal Reserve does raise 50 basis points, that will bump the Fed Funds rate up to 4.50% (Bankrate, Dec. 2022). By the way, do you know what the market expected at the end of last year regarding what the rate would be at the end of this year? It was only expected to be 0.83% (MarketWatch, Dec. 2021). Surprise! That’s a leading reason why the over-all stock market is down on the year.

Last week was tough for the overall market, which lost value on four of the five trading days for a total weekly loss of over 3%, once again led by growth stocks which lost over 4% (Morningstar, Dec. 2022). However, for the fourth quarter so far:

• The US market is up nearly 10%, led by value (+15%); growth stocks and bonds are both up about 4% for the quarter (Morningstar, Dec. 2022).
• The star, however, has been international, which is up over 16% for the quarter (Morningstar, Dec. 2022).
• A big reason for the international outperformance is the recent weakness in the US dollar (Morningstar, Dec. 2022). From its recent peak levels, the buck has lost ~ 14% versus sterling, around 10% against the euro and yen, and 5% versus the renminbi (Morningstar, Dec. 2022).

Here is where key interest rates ended up last week:

• Last week Ten-year Treasury yields finished at 3.57% (up 6 basis points from last week); the range last week was 3.40-61% (Yahoo Finance, Dec. 2022).
• The yield to maturity on the Bloomberg Aggregate Bond Index came down again last week to 4.53%, as of December 9, 2022 (up 4 basis points) (Bloomberg, Dec. 2022).
• The average money market yield continued to rise last week, finishing at 3.62% as of December 9, 2022 – that’s higher than 10-year Treasuries (Crane Data, Dec. 2022)!
• The average 30-year fixed mortgage rate continued its decline off recent highs, down another 15 basis points last week to 6.52% (Bankrate, Dec. 2022).
  • The yield spread between 30Y mortgages and 10Y treasuries is typically under 2%, so this 3% spread hopefully means mortgage rates will continue to fall (Bankrate, Dec. 2022).
• Questions on municipal bonds? Here’s a nice overview on munis from Morningstar (Nov. 2022).
  • One excerpt:“for investors who are married filing and jointly in tax-year 2022, for example, the 24% tax bracket spans a range of taxable income from $178,151 to $340,100. Investors in that bracket can currently earn a taxable equivalent yield of 4.28% for a typical intermediate-term muni fund, which compares favorably with the average yield of 3.55% for intermediate-term core bond funds.” (Morningstar, Nov. 2022)

Deeper Dive

It’s that time of year for outlooks. Here’s a nice summary from Bloomberg last week:

• “Some of the world’s biggest investors predict that stocks will see low double-digit gains next year, which would bring relief after global equities suffered their worst loss since 2008. Amid recent optimism that inflation has peaked — and that the Federal Reserve could soon pivot — 71% of respondents in a Bloomberg News survey of 134 fund managers expect equities to rise, versus 19% forecasting declines. For those seeing gains, the average response was a 10% return. (Meanwhile) …everyone is bullish on bonds. KKR is bullish, Morgan Stanley is bullish, Pimco is bullish — the list goes on.” (Bloomberg, Dec. 2022)

Speaking of sentiment, how do CEOs of corporations currently feel? How about … even more negative about the next six months than they were during the past four recessions (Goldman Sachs, Dec. 2022)! While that is incredible, it should be noted that the stock market was higher 12 months later after each of those sentiment lows (Goldman Sachs, Dec. 2022).

Outlook on growth stocks? According to Strategas, it’s not looking good short-term:

• “For much of the year, the consensus belief was that growth stocks were burdened by the unholy trinity of rates up, $ up, and inflation hot. In that respect, doesn’t it seem important that over the last 6 weeks it’s been rates down, $ down, and inflation cooler, and the growth stocks have very little to show for it? We think so.The QQQ vs. equal-weight S&P 500 pair has effectively made zero progress over this stretch, and the real speculative corners of the tape – e.g., ARK, IPOs, memes, etc. – are back on their lows. When something in this business doesn’t respond to information as the consensus would expect, it’s rarely the market that’s wrong.” (Strategas, Dec. 2022)

Which country will dominate the global economy in the decades ahead? Two out of three of these studies say it will be China (Klement on Investing, Dec. 2022). In 2023, there’s even a plausible case that China’s economy can grow in 2023 and keep the global economy expanding while the US economy contracts (Klement on Investing, Dec. 2022).

Managed futures strategies are having a great year – this December 6 article makes a case for this strategy and a portfolio weight of up to 10% (Institutional Investor, Dec. 2022).

Assets in direct indexing strategies are expected to hit $825 billion by 2026, outpacing the growth rate of mutual funds, exchange-traded funds and traditional separately managed accounts, according to a new report by Cerulli Associates and Parametric (FundFire, Dec. 2022).

ETF Flows: Bond investors swap mutual funds for ETFs at record pace (Wall Street Journal, Dec. 2022)

Last week’s economic data featured:

• November Producer Price Index (PPI), which surprised to the upside (First Trust, Dec. 2022). Producer prices are up 7.4% versus a year ago (First Trust, Dec. 2022). According to First Trust Data Watch from December 9, 2022: “Peak inflation is likely behind us, but today’s above-consensus 0.3% rise in producer prices is yet another sign the Fed’s job is not done.”

On the topic of inflation, here were some good inflation tidbits from the last week:

• Gas prices are down year-over-year (New York Times, Dec. 2022). 
• However, it should be noted that last week U.S. crude levels fell to their lowest point in 36 years (New York Times, Dec. 2022). It was 65 straight weeks of oil sales, and this year has been the largest drop EVER (New York Times, Dec. 2022).
• US used vehicle index falls y/y by most in 25 years (New York Times, Dec. 2022).

The Inflation Guy Michael Ashton shared his latest outlook on inflation, particularly on the role of money supply:

• Between December 1992 and December 2019, M2 grew an aggregate of 347% (5.71% per annum). Real GDP increased 95.3% (2.51% p.a.), and the price level (using CPI) rose 81.1% (2.22% p.a.) (Investing.com, Dec. 2022). By definition, the sum of changes in GDP and the price level, 4.74% per annum, is approximately equal to the sum of the changes in the money supply and money velocity; so, we know that the difference was declining V (since M2 was +5.71% and that’s more than 4.74%) (Investing.com, Dec. 2022).
• In the short term: Since the end of 2019, M2 is +40.4%, GDP +4.3% (total, not annualized), and prices +15.5% (Investing.com, Dec. 2022). This has coincided (caused?) a massive decline in money velocity…which is in the process of correcting (Investing.com, Dec. 2022).
• So in my view, the path of inflation fromhere looks like this: steadily high-ish inflation for a few years—think a 4% handle as being an optimistic outcome (Investing.com, Dec. 2022).

Fun week on the economic calendar posted by Calculated Risk this week:

• November CPI – Tuesday
• FOMC’s expected 50 basis point hike – Wednesday
• Retail Sales – Thursday

Atlanta Fed’s GDPNow dropped to 3.2% for expected growth in the fourth quarter of 2022 (GDPNow, Dec. 2022).

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

• Crypto prices were mostly flat over the last week (Decrypt, Dec. 2022). Bitcoin hovered around $17,100, while Ethereum dropped 1% to around $1,260 (CoinMarketCap, Dec. 2022). Litecoin continued its run of gains, up just under 1% (CoinMarketCap, Dec. 2022). Dogecoin gave back some of its recent surge, falling 8% (CoinMarketCap, Dec. 2022).
• The house Financial Services committee is weighing a subpoena for FTX founder Sam-Bankman Fried (Arcane Research, Dec. 2022). We learned that more than $5 Bil of Alameda research’s assets (likely FTX client assets) were in private entities (Arcane Research, Dec. 2022). FTX almost inked a $100 mil sponsorship deal with Taylor Swift (Arcane Research, Dec. 2022)! Stablecoin issuer Circle terminated its deal to go public via SPAC (Arcane Research, Dec. 2022). The CEO of Goldman Sachs wrote a WSJ op-ed on blockchain technology and what his bank is doing in the space (Wall Street Journal, Dec. 2022).
• Hedge fund Fir Tree Capital Management sued the Grayscale Bitcoin Trust for mismanagement (Decrypt, Dec. 2022). One such allegation is that GBTC claims they cannot redeem shares, yet regulations state that they can if not within five days of a creation (no new shares have been created in 1.5 years) (Decrypt, Dec. 2022).

Additional Resources

One of the big stories of the year, of course, revolved around an individual that goes by his initials: SBF (Investopedia, Dec. 2022). In the end, could his name end up being synonymous with the likes of Bernie Madoff? It was not that long ago that SBF was being revered, shown in a link that went around recently regarding a two-minute collection of clips of CNBC hosts being nice to SBF and showering him with accolades (“the J.P. Morgan of crypto”), per a Tom Elliott tweet on December 2, 2022.

“The goal of life is to die young — as late as possible!” ~ Ashley Montagu (GoodReads, Dec. 2022).

This week’s Orion’s The Weighing Machine podcast is with Fidelity Investment’s Paul Ma. In this interview, we cover a lot of ground, but the emphasis is on Paul’s work with financial advisors and how they are constructing portfolios. A lot of good frames of references for portfolio construction in this podcast. Thanks again, for listening – the numbers are definitely up for TWM listeners. If you haven’t done so already, please subscribe/follow the podcast.

Join us for Orion’s Ascent 2023 Advisor Conference, being held at the World Center Marriott in Orlando, FL from February 27-March 2! Don’t wait! Register Now. Sign up before December 31 and receive early bird pricing. While registering, book your room at the Orlando World Center Marriott for the Orion discounted rate. The best part about Ascent? We’ve put together a lineup of 80+ sessions, which guarantees that there will be something there for everyone. Get ready to customize your Ascent 2023 schedule and dive into our Content Catalogue to pick from our library of content tracks that include: Orion Core Tech, Behavioral Finance, Growth, Portfolio Creation, M&A, Risk Intelligence, CRM/Marketing, Data, Trading & Compliance. Ready to explore? Check out the full Content Catalogue at Ascent.Orion.com.

Want to know what the most popular Portfolio Recipes webinar was last year? Sign up for the Orion Portfolio Solutions webinar on December 14 on our Financial Advisor Success Hub. By the way, the recipe was Downside Protection with Ocean Park and Toews Asset Management.

Another classic market cartoon that captures the market news is in Art Hogan’s tweet on December 6, 2022.

For more awesome photos, check out the 30 best winning photos from “The 2022 All About Photo Awards” at 121Clicks from May 29, 2022.

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.

2411-OPS-12/13/2022

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/.