Weekly Market Bullets with Rusty Vanneman, CFA, CMT, BFA, Vol. 98

Hope you had a safe and happy holiday weekend. The new year is now in sight!

Santa provided a lump of coal for some investors last week, as not all parts of the markets enjoyed gains during the “Santa Rally” (Morningstar, Dec. 2022). Small cap, value and dividend stocks were able to scratch out gains, while large cap tech lost ground; International stocks also gained (Morningstar, Dec. 2022). Coming into the new week, it should be noted that historically the market generates an above-average gain in the last week of the year (though typically not as strong as last week’s historical record) CNBC, Dec. 2022).

A repeat bullet from last week, but 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”.

Big news for savers last week from the Secure 2.0 Act. From where I sit, some HUGE news is allowing tax free rollovers from 529 plans to ROTH IRAs (CNBC, Dec. 2022). That will make 529s more attractive for sure but note there are plenty of restrictions on those rollovers (CNBC, Dec. 2022). Nonetheless, it’s good for savers and investors.

Investors will not only benefit, but they’ll likely need some help from advisors to navigate the changes. More on Secure Act 2.0 from a December 20, 2022 article in Financial Advisor Magazine: “Lawmakers have successfully attached SECURE 2.0 retirement provisions to the 4,000-page 2023 omnibus legislation that Congress must pass by Friday at midnight to avoid a government shutdown. The SECURE Act 2.0 (a follow-up to the Setting Every Community Up for Retirement Enhancement Act) is designed to make it easier for individuals to save enough for a dignified retirement. Provisions include a 100% tax credit for small businesses that create retirement plans; an incremental increase to age 75 in the required minimum distribution (RMD) age for retirees; and a significant 50% increase that retirement plan participants are allowed in their catch-up contributions, up to $10,000 annually beginning when participants are age 60.”

And now for numbers. Here are the year-to-date numbers as of last Friday:

  • The S&P 500 is down over 18% (Morningstar, Dec. 2022).
  • The economic sector with the best year-to-date gain is Energy; it’s up over 65% with days left in the year (Morningstar, Dec. 2022).
  • Other sectors with year-to-date gains, albeit small ones, heading into the last week are utilities and consumer staples (Morningstar, Dec. 2022).
  • Meanwhile, technology, consumer discretionary, and communications are all down big with current losses ranging from -28% to nearly -40% (Morningstar, Dec. 2022).
  • Regarding 3-year numbers, Value is now ahead of Growth (Morningstar, Dec. 2022). When was the last time Value was leading Growth at month-end? It was the end of Feb 2017 (Morningstar, Dec. 2022).
  • Though it might surprise many, the UK is down “only” 4% as of last Friday (Morningstar, Dec. 2022). Despite their many economic problems, their valuations have evidently been attractive to many investors (Morningstar, Dec. 2022).
  • Among emerging markets, Brazil is up over 20% for the year (Morningstar, Dec. 2022). The Mexican market is also up on the year so far (Morningstar, Dec. 2022).
  • Commodities are up about 16% (Morningstar, Dec. 2022).
  • Though the US Dollar has had a big year (despite some recent losses), the dollar is only up less than 1% year-to-date for emerging market currencies (Morningstar, Dec. 2022). I bet that might surprise some people.
  • Also, fixed income has had a tough year (Morningstar, Dec. 2022). All fixed income sectors are down a lot, with many holding their “worst year ever” (Morningstar, Dec. 2022). One fixed income sector (besides cash, of course) with a little luck this week could finish the year with a gain – bank loans (Morningstar, Dec. 2022). They are down less than -0.8% as of last Friday (Morningstar, Dec. 2022).

Here is where key interest rates ended up last week:

  • Last week Ten-year Treasury yields jumped up over a quarter point last week, finishing at 3.75% (Yahoo Finance, Dec. 2022).
  • The yield to maturity on the Bloomberg Aggregate Bond Index also increased last week, ending at 4.63% (up 20 basis points) (Bloomberg, Dec. 2022).
  • The average money market yield continued to rise last week, finishing at 4.03% (Crane Data, Dec. 2022). Cash is no longer trash!
  • The average 30-year fixed mortgage rate moved lower last week to 6.47% (Bankrate, Dec. 2022). Despite finally moving lower than treasury yields, the gap between mortgages and treasuries remains much wider than usual (Bankrate, Dec. 2022). I’d expect mortgage rates to keep moving closer to treasury yields in the months ahead.

Deeper Dive

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, Dec. 2022). Over the last week, these odds have shifted a bit back towards a 50 basis point increase (CME Group, Dec. 2022).

As for one outlook heading into 2023, at least for a short-term outlook, the trend is still bearish for the stock market (Bloomberg, Dec. 2022). A chart produced each week by Brinker Capital’s Michael Hadden shows S&P 500 prices over the last year. The S&P’s price shows a steady progression of price highs and price lows (Bloomberg, Dec. 2022). For the market to get “healthy” from a technical/price perspective, it will need to not only stay above the price lows from a few months ago, it will also need to move through the November highs (Bloomberg, Dec. 2022).

Is it possible for stocks to fall two years in a row? Most likely not, but it’s possible! From a December 21, 2022 Bloomberg article on how often the market loses two years in a row: “Since 1928, the S&P 500 Index has only fallen for two straight years on four occasions: The Great Depression, World War II, the 1970s oil crisis and the bursting of the dot-com bubble. Drops in the second year were always deeper than in the first.”

Hat tip for Brinker Capital’s Frank Nickel for noting a securities chart from Strategas last week that shows the US now makes up over 63% of the global stock market (Strategas, Dec. 2022). That’s even higher than it was in the nineties, the last time the US had an extended period of outperformance (Strategas, Dec. 2022). Interestingly, once international turned around 20 years ago, it did end up pushing the US market cap % of the global stock market back to 40% (Strategas, Dec. 2022). Things can change fast.

Commodities had a great year of performance, both in absolute and relative terms, according to a BofA Global Fund Manager Survey posted by Game of Trades on Twitter (Dec. 2022). Not so much when it comes to positioning as a survey of portfolio managers show their largest underweight relative to bonds since 2008 (Game of Trades, Dec. 2022).

Want to know the latest trends in portfolio construction among advisors? Here is the latest Fidelity survey of financial advisors on portfolio construction trends (Fidelity, Dec. 2022). It included the typical portfolio of 14 holdings using six different asset managers.

Check out this stat on Vanguard’s share of the US Fund Market. In just 30 years, it has gone from about a 5% market share to nearly 30% of the US Fund Market (Bloomberg, Dec. 2022). Need more proof of Vanguard’s popularity? The Weighing Machine (TWM) podcast from last week with Jeff DeMaso from the Independent Vanguard Adviser had the most listeners in 24 hours and over the first week than any other TWM episode.

Ben and I had a question last week about how many companies in the stock market are profitable. Here are the latest stats from Brinker’s earnings whiz Grant Engelbart: On a trailing basis, 60% of small cap (Russell 2000) are profitable (73% of market cap) (Bloomberg, Dec. 2022). As for the Nasdaq, it’s 86% are profitable; for the S&P 500, it’s 95% (Bloomberg, Dec. 2022).

For more on earnings, check out the interview with Grant Engelbart in the latest Weighing The Risks podcast, “Corporate Earnings Weakness: Prepare for the Future by Stress-Testing Different Scenarios” from December 26, 2022.

Economic data from last week included lots of housing data:

  • US home sales drop for 10th month in a row (Wall Street Journal, Dec. 2022).
  • Housing starts are down 16.4% versus a year ago:
    • “Housing isn’t going to be a source of economic growth in the year ahead, but do not expect a housing bust nearly as harsh as in the 2000s. Unlike the previous housing bust, we do not have a massive oversupply of homes and those who locked-in fixed-rate mortgages before this year will hold their homes dear.” (First Trust, Dec. 2022)

Investor sentiment dropped last week to its worst levels in three months according to the AAII Investor Sentiment (Dec. 2022). This is a contrarian indicator that – on average – precedes above-average gains and likelihood of gains in the 3-, 6- and 12-months that follow (AAII, Dec. 2022).

It is a pretty quiet week on the economic calendar posted by Caluclated Risk. There is some housing data of note, but we’ll get more important data including labor data in the first week of the year.

Atlanta Fed’s GDPNow jumped back up to 3.7% for expected growth in the fourth quarter (Dec. 2022). This is an increase of nearly 1% over the last week (GDPNow, Dec. 2022). Again, the economy continues to show more positive momentum than most seem to think (GDPNow, Dec. 2022).

Additional Resources

“This is Christmas. The season of perpetual hope.” ~ Kate McCallister in “Home Alone” (GoodReads, Dec. 2022).

Have you heard of ChatGPT? If you haven’t yet, you will. It’s an AI tool that can do a bunch of things, including writing poems. Hat tip to Orion’s Jered Matzke on the poem below where he simply asked ChatGPT to write a poem about Orion Portfolio Solutions and how this wealth management system platform can help advisors with their fee-based business.

This week’s Orion’s The Weighing Machine podcast is with Shawn Reynolds from Van Eck. In this interview we talk about real assets, and specifically natural resource stocks. There is a lot to consider in this podcast, particularly given the recent performance of real assets.

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.

Citywire’s list of “20 Most Influential Gatekeepers” in money manager due diligence includes Brinker Capital’s Chris Hart (Dec. 2022).

It’s that time of year for many to create resolutions for the new year. Check out Ryan Holiday’s secret to better habits in 2023 (Dec. 2022).

Harvard Business Review’s “3 Simple Habits to Improve Your Critical Thinking” (HBR.org, May 2019):

  1. Question assumptions
  2. Reason through logic
  3. Diversify thought

Consider items from the “End of Year Financial Checklist for 2022” by The White Coat Investor (Dec. 2022).

Another awesome picture from another great list of “World Press Photo winners 2022”: “Abuelo-Estrella, an elder in the Garza hill, Mexico. For the Na Savi people, elders are respected since they contain wisdom and connection with ‘mother earth’. Every 31 December, the Na Savi indigenous communities climb the Cerro de la Garza to perform rituals that commemorate the end and beginning of a cycle.” (The Guardian, April 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 orionportfoliosolutions.com/blog.

2502-OPS-12/28/2023

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/.

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.