Weekly Market Bullets with Rusty Vanneman, CFA, CMT, BFA, Vol. 97

Happy Holidays! Hope you survived Super Saturday (the last Saturday before Christmas) and although the national retail sales numbers were a little soft relative to expectations, the stores I went into were packed! On Sunday, how about that World Cup Final? Argentina, led by “the greatest of all-time” Messi, beating defending champ France in what many consider to be the greatest World Cup Final. It was indeed an epic match, and the cherry on top was winning the family World Cup pool!

Hanukkah started this past week, but it’s also that time of year to expect a Santa Claus Rally (Investopedia, Oct. 2022). In short, this means that the stock market tends to gain ground the week before Christmas (some like to say until year-end) (Investopedia, Oct. 2022). The way seasonal patterns have generally held to-form this year, I would expect that Santa will be good to the markets this week.

The last week of the year in the markets should be interesting. Here are a few reasons why:

  • First, there may be low volume on the exchanges. This could amplify price movements.
  • Next is the idea of rebalancing, where investors (usually institutional) will sell their relative winners and buy their relative losers to bring their portfolios back to strategic weights. Typically done quarterly, this could mean selling stocks and buying bonds – given the strong performance of stocks this quarter.
  • There is also the practice of many institutional investors to window-dress their holdings (Investopedia, Feb. 2021). This is the practice of making their top holdings look prettier than they actually were by quarter-end (for the official statements that clients will see) by adding or introducing names that have been performing relatively well, and deemphasizing/selling those doing relatively poorly (Investopedia, Feb. 2021). This could mean that, all else being equal, within the stock market you could expect value stocks to outperform growth stocks to close out the year, like they have all year.
  • Lastly, there are the last-minute investors doing tax loss harvesting (Investopedia, March 2022). Better late than never, there is real economic value to this activity in taxable accounts. It’s not too late! If it makes it easier, don’t call it “tax-loss selling”, but “tax credit harvesting”. That tip alone could pay for the annual subscription to these Weekly Bullets!

In terms of price action, last week was another down week for the overall market, driven primarily by a negative reaction to the Consumer Price Index (CPI) print last Thursday (CNBC, Dec. 2022). The total US Market dropped about 2% off signals that the Fed will remain hawkish into 2023 to continue to combat inflation (CNBC, Dec. 2022).

As we approach the end of the year, here’s how 2022 returns are shaping up year-to-date:

  • The overall US market is down about 19% (Morningstar, Dec. 2022).
  • Value has outpaced growth by about 34% (Morningstar, Dec. 2022).
    • Value has now outperformed Growth by about 1% in the 3-year number – the first time we’ve seen this in years (Morningstar, Dec. 2022). This will likely impact investment flows next quarter/year (Morningstar, Dec. 2022).
  • Commodities are up about 16% (Morningstar, Dec. 2022).
  • Bonds are down about 11% (Morningstar, Dec. 2022).

Here is where key interest rates ended up last week:

  • Last week Ten-year Treasury yields finished at 3.48% (down 9 basis points from last week); the range last week was 3.42-63% (Yahoo Finance, Dec. 2022).
  • The yield to maturity on the Bloomberg Aggregate Bond Index came down again last week to 4.43%, as of December 16, 2022 (down 10 basis points) (Bloomberg, Dec. 2022).
  • The average money market yield continued to rise last week, finishing at 3.68% as of December 9, 2022 (Crane Data, Dec. 2022). That’s higher than 10-year Treasuries (Crane Data, Dec. 2022)!
  • The average 30-year fixed mortgage rate moved back up slightly last week to 6.60% (Bankrate, Dec. 2022).

Deeper Dive

The next Federal Open Market Committee (FOMC) meeting isn’t until the end of January and, as of now, according to the CME FedWatch Tool, there’s a 74% chance we see a 25 basis point increase to Fed funds and a 24% chance we see a 50 basis point increase (CME Group, Dec. 2022). This is certainly a shift in sentiment compared to prior months, as we have seen consistently high probabilities of 50-75 basis point increases month-to-month (CME Group, Dec. 2022).

Those numbers are market-based expectations – the Federal Reserve has obviously raised their expectations over the last year (CNBC, Dec. 2022). In fact, consider this, 17 out of 19 Fed officials now see Fed funds above 5%. In September, none of them did (CNBC, Dec. 2022)!

Isn’t it nice that “income” is back in fixed income (New York Times, Dec. 2022)?

  • The adjustment to higher rates has been painful, but that’s the hangover from artificially low interest rates (New York Times, Dec. 2022). The financial environment is normalizing (New York Times, Dec. 2022).

Quantitative strategies had a great year, according to a December 14, 2022 WSJ article, including managed futures strategies such as those highlighted in the October 2022 Orion Portfolio Solutions (OPS) Flows webinar.

I love this market call from Nassim Nicholas Taleb on December 15, 2022 in a Tweet:

  • Question: When should one start buying (back) assets? (Nassim Nicholas Taleb, Dec. 2022)
  • Answer: On the next visit to a random restaurant when you get old fashioned attention from the wait staff. The problem is labor shortages. (Nassim Nicholas Taleb, Dec. 2022)

Strategas on early estimates for negative 4Q Earnings Growth: Earnings growth for the aggregate index is estimated to be -0.7% with 7 of the 11 GICS sectors expected to see negative earnings growth. Furthermore, energy’s outsized expected growth rate continues to mask some of the underlying weakness that companies are already feeling. Corporations are likely going to face even more pressure in the quarters ahead especially if the labor market weakens. (Strategas, Dec. 2022)

Did you know that Apple’s market capitalization now equals the bottom 180 companies in the S&P 500? Per a LinkedIn post by Garett B. on December 12, 2022.

When it comes to investment flows this year, investors might not be buying, but they’re not really selling either (Callum Thomas, Dec. 2022), per data from Goldman Sachs posted by Callum Thomas in a December 17, 2022 Tweet.

Last week’s economic data featured:

  • Consumer Price Index (CPI) – The Consumer Price Index (CPI) rose 0.1% in November, below the consensus expected +0.3%; the CPI is up 7.1% from a year ago (First Trust, Dec. 2022).
  • Retail Sales – Although overall retail sales are up 6.5% from a year ago, that pace is not outpacing inflation, with the CPI up 7.1% over the same period (First Trust, Dec. 2022).

Even if most economists seem to think so, don’t raise your hopes that inflation is going back towards 2% anytime soon. According to Jim Bianco in a December 13, 2022 Tweet, Wall Street economists always think (at least since March 2018) that inflation is going to 2%.

On that last point about how fast inflation actually goes down, what does history show? According to Rob Arnott of Research Affiliates in this November 13, 2022 article in Barron’s:

  • The Fed and the markets alike anticipate inflation pressures abating significantly in 2023 (Barron’s, Nov. 2022). However, history is not on their side, according to a paper from Rob Arnott, Research Affiliates founder and chairman, and Omid Shakernia, a partner at the firm who heads its multi-asset strategies (Research Affiliates, Nov. 2022).
  • They find that when year-over-year inflation rises above 8%, as has happened with the CPI this year, it doesn’t recede quickly but tends to accelerate 70% of the time, based on data from 14 advanced economies dating back to January 1970 (Research Affiliates, Nov. 2022). That doesn’t mean inflation necessarily will hit new highs in coming months (Research Affiliates, Nov. 2022). But, given the previous consensus that price pressures would be transitory, they write, “we dismiss that possibility at our peril” (Barron’s, July 2021).
  • The real problem is that when inflation crosses the 8% threshold, it becomes more intransigent and requires more restrictive monetary policy for a longer period, Arnott and Shakernia contend (Research Affiliates, Nov. 2022). Given that U.S. inflation has run above 6% for the past year and over 8% for the seven months through September (before dipping to 7.8% in October), history indicates that the median time it will take before inflation eases below 3% is 10 years (Research Affiliates, Nov. 2022). That’s not a typo.

Another thought on inflation, again from Nassim Nicholas Taleb in a December 12, 2022 Tweet:

  • During the bubble and (near) Zero Interest Rate Policy, investors were subsidizing tech consumers (Nassim Nicholas Taleb, Dec. 2022). Now, start learning to pay up for services (Nassim Nicholas Taleb, Dec. 2022).

On this week’s economic calendar posted on the Calculated Risk blog:

  • Wednesday: Existing Home Sales
  • Thursday: Final Q3 GDP; the consensus estimate is for a 2.9% year-over-year increase (Calculated Risk, Dec. 2022).

Atlanta Fed’s GDPNow dropped to 2.8% for expected growth in the fourth quarter of 2022 (GDPNow, Dec. 2022). While this estimate has been falling, we are still in positive territory despite market and economic turbulence (GDPNow, Dec. 2022).

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

  • Cryptocurrency prices dropped last week following the Federal Reserve’s hawkish tone (CoinMarketCap, Dec. 2022). Bitcoin fell 3% to under $17,000 and Ethereum dropped 8% to under $1,200 (CoinMarketCap, Dec. 2022). Many other coins fell double digits, including Dogecoin which dropped nearly 20% (seems to move in lock-step with Elon Musk’s activity) (CoinMarketCap, Dec. 2022).
  • Sam Bankman-Fried was arrested last week on fraud charges (from the DoJ, SEC, and CFTC!) related to FTX (DeCrypt, Dec. 2022). Publicly traded bitcoin miner Core Scientific received a takeover bid and jumped 160% on the news (DeCrypt, Dec. 2022). There continue to be whispers about the liquidity position of Digital Currency Group (DCG owns Grayscale, Genesis, Coindesk, and many other firms) (DeCrypt, Dec. 2022). Donald Trump released an NFT collection that promptly sold out and went on to be the highlight of Saturday Night Live over the weekend (prices have been quite volatile) (DeCrypt, Dec. 2022).
  • No new digital asset ETF news.

Additional Resources

“When everyone thinks something will happen, something else will happen.” ~ Bob Farrell (GoodReads, Dec. 2022)

This week’s Orion’s The Weighing Machine podcast is with Jeff DeMaso from the Independent Vanguard Adviser. This was a fun interview. Jeff’s firm is just as the name says – independent from Vanguard. In turn, he lets it all hang out. For those who want to know more about Vanguard and Jeff’s firm (which is known for edgier-than-average writing), check out The Independent Vanguard Adviser.

Speaking of Weighing Machine podcasts, recent podcast guest DFA’s Bryce Skaff published this thoughtful short read on LinkedIn on December 14, 2022 about how life can be unpredictable: “What my 2022 heart attack taught me about life and investing”.

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.

Again, so many awesome photos in all the various “best pictures of 2022” lists, including one on My Modern Met from NASA/ESA/Hubble; Processing: William Ostling (APOD) (Dec. 2022).

For those who liked the Disney+ “Limitless” series, check out the podcast of Chris Hemsworth talking with Peter Attia about the series: Chris Hemsworth on Limitless, longevity, and happiness (PeterAttiaMD.com, Dec. 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.

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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/.

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.