Weekly Market Bullets with Rusty Vanneman, CFA, CMT, BFA, Vol. 99
Happy New Year!
Nice to finally put last year’s markets behind us. It was a painful year for losses, but in hindsight perhaps not too surprising because balanced portfolios did have some of their best rolling 3- and 5-year returns just 12 months ago (Morningstar, Jan. 2023). The markets do take a step back for every two steps forward. Here’s looking forward to the next steps forward.
As for that step back, here are some notable stats from last year:
- S&P 500 fell 18.1% in 2022, its worst year since the 2008 financial crisis (Yahoo Finance, Jan. 2023). Since 1940, the only years with a larger decline: 1974, 2002, and 2008 (Yahoo Finance, Jan. 2023).
- The Dow, meanwhile, fell a comparably modest 9% in 2022; the NASDAQ fell over 33% (Yahoo Finance, Jan. 2023).
- The bond market suffered through its worst year in modern history (Yahoo Finance, Jan. 2023).
- The average 30-year fixed mortgage rate finishing 2022 near 6.4%, its highest year-end level since 2001 (Yahoo Finance, Jan. 2023).
- The dollar logged its biggest annual gain since 2015 as interest rate increases from the Federal Reserve boosted demand for the greenback (Yahoo Finance, Jan. 2023).
- Bitcoin (BTC-USD) was down 65% (Yahoo Finance, Jan. 2023).
- As for balanced portfolios, a 60/40 Portfolio of US Stocks/Bonds was down 17.5% in 2022, its worst year since 1937 and third worst in history (note: total returns since 1928) (@CharlieBilello, December 31, 2022).
- As for bonds, a December 31 Tweet by @BiancoResearch has a chart proving how epically bad a year it was for bonds.
As for the 3-year return for the US stock market, there’s a nice reminder to focus on the forest instead of the trees in an overview of the market for long-term investors from Dynamic Investment Management’s Kostya Etus on December 2, 2022 at dynamicadvisorsolutions.com.
The 3-year return for a traditional US-based balanced portfolio (60% stocks / 40% bonds) is still up over 3%/year (despite a rare 3-year loss in bonds) and is also still up over 5% a year over the last five years (Dynamic Advisor Solutions, Dec. 2022). Those are below-average returns for both, of course, but probably better than most expected, particularly after “one of the worst years ever” in the markets last year (Dynamic Advisor Solutions, Dec. 2022).
Speaking of 3-year returns, it’s been a long time since value stocks had a better trailing 3-year return than growth stocks at quarter-end (Morningstar, Dec. 2022). Using the Morningstar indices, they have now outperformed 6.7% to 4.6% per year over the last three years (Morningstar, Dec. 2022). Can value stocks still outperform? According to an October 2022 chart from Research Affiliates, they are not as cheap as they were a year ago (which was about the cheapest they had been relative to growth in over 50 years), but they’re still on sale!
Here is where key interest rates ended up last week:
- Last week Ten-year Treasury yields finished at 3.88% (up 13 basis points for the week) (Yahoo Finance, Jan. 2023).
- The yield to maturity on the Bloomberg Aggregate Bond Index also increased last week, ending at 4.74% (up 11 basis points) (Bloomberg, Jan. 2023).
- The average money market yield continued to rise last week, finishing at 4.05% (up 2 basis points) – better than 10Y Treasuries! (Crane Data, Jan. 2023)
- The average 30-year fixed mortgage rate moved lower last week to 6.59% (up 12 basis points) (Bankrate, Jan. 2023).
We will get some Federal Reserve’s meeting minutes this week to assess. 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).
One part of the fixed income markets looks interesting: municipal bonds. Belle Haven Investments’ CIO Matt Dalton: “When the muni buyers get their heads out of the sand, there will not be enough supply to go around.” This translates to, those who wait (or time their entry) will be disappointed to learn the yields they heard about are gone. AA credits have already seen 70-80bps trimmed from peak yields in late October.” Expected Yields (Belle Haven Investments, Dec. 2022).
Which stocks were the biggest losers in 2022? According to a December 30, 2022 article by Philip van Doornon on Market Watch:
- In terms of market cap, it was (in order), Apple, Amazon, Microsoft, Tesla, and Meta (Facebook) (Market Watch, Dec. 2022).
- In fact, and here’s a stat that might blow your mind, the market cap loss from Big Cap Tech in 2022 was more than ALL of the losses from crypto AND the 2007 subprime losses (Market Watch, Dec. 2022). Wow.
Related to that point, Tesla just had record earnings (Market Watch, Dec. 2022). Yet, its story and excitement were obviously way ahead of its fundamentals. That might even be the case now according to this past week’s article from Scott Galloway and his 2023 Predictions (which, by the way, is loaded with goodies) (Prof Galloway, Dec. 2022).
Another pic on Tesla, but one could say it applies to all of large cap tech just 12 months ago given their high valuations at the time: A cartoon from Garrett Baldwin’s January 1, 2023 LinkedIn article called “Postcards from the Florida Republic”. Baldwin’s time frame is too short for long-term investing, but his writing and perspective is different, thought-provoking, and humorous.
Speaking of valuations, the S&P’s valuation dropped from 21.4 to 16.8 last year (CNBC, Dec. 2022). That was a 22% drop in valuations (CNBC, Dec. 2022). The S&P dropped 19% (CNBC, Dec. 2022). Again, valuations do matter.
What are the chances for a recession in 2023? Most think it’s a slam dunk to have one, but not so fast. Here are some excellent points from Mark Zandi, the chief economist at Moody’s Analytics, to counter the “sure-thing recession” (CNBC, Dec. 2022).
- “Debt-service burdens have never been lower, households have a boatload of cash, corporates have good balance sheets, profit margins rolled over, but they’re close to record highs,” Zandi said. “The banking system has never been as well capitalized or as liquid. Every state has a rainy-day fund. The housing market is underbuilt. It is usually overbuilt going into a recession. …The foundations of the economy look strong.” (CNBC, Dec. 2022)
- As for the anticipated labor market weakness, Zandi said, “I think we’ll see 100,000 and then next year it will basically go to zero. …That’s not enough to cause a recession but enough to cool the labor market.” (CNBC, Dec. 2022) He said there could be declines in employment next year (CNBC, Dec. 2022).
Various Surveys: “Advisors to Make Bigger Push into Alts in 2023” in FundFire, December 29, 2022. There were a lot of takeaways from the surveys:
- Global alternative assets under management are expected to increase to $23 trillion by the end of 2027 from $14 trillion at the end of 2021 (FundFire, Dec. 2022). That’s nearly a 65% increase in six years (FundFire, Dec. 2022).
- Roughly 70% of advisors are tapping into alternatives to reduce exposure to public markets, and about two-thirds are using the strategies to provide a level of risk protection (FundFire, Dec. 2022). Nearly 60% of advisors surveyed said they were using alternatives to generate income (FundFire, Dec. 2022).
- Most advisors, or 68%, are currently using liquid alternative mutual funds and 54% are putting money in liquid alternative exchange-traded funds, according to Cerulli (FundFire, Dec. 2022).
- Nearly 90% of advisors intend to increase their allocations to alternative asset classes over the next two years, according to a recent survey of about 200 independent advisors, asset managers and other industry professionals by Mercer and CAIS (FundFire, Dec. 2022).
- UBS Global Wealth Management, for example, is recommending its wealthy clients allocate up to 20% in 2023 to less liquid asset classes such as hedge funds, private equity, private debt and real estate in portfolios to complement traditional stocks and bonds, as reported (FundFire, Dec. 2022).
- Across all channels, 60% of advisors are currently allocating between 6% to 19% of client assets to alternatives, with only 8% allocating 20% or more of assets, according to a November survey of more than 800 advisors released by ISS Market Intelligence (FundFire, Dec. 2022).
- Cerulli, meanwhile, said advisors already investing in alternatives are currently allocating 14.5% of assets to those strategies compared to 10.5% in 2021 (FundFire, Dec. 2022). Those allocations are expected to increase to 17.5% by 2024, as reported (FundFire, Dec. 2022).
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 the “ETFs in pictures 2022” article from The ETF Educator on December 29, 2022:
- Nearly $600 billion flowed into ETFs this year – trailing only 2021’s record haul of $900+ billion (The ETF Educator, Dec. 2022). The ETF industry also featured record trading and options volume, near record launches, and big name new entrants (The ETF Educator, Dec. 2022).
- ETFs might not be the “shiny new toy” in the industry, but it’s the biggest secular wave and where assets are going (The ETF Educator, Dec. 2022).
No real economic data from last week, but let’s have First Trust summarize the situation: “We live in unprecedented times. The recession in 2020 was not so much a recession as it was a lockdown. Using ‘normal words’ to describe the economy in the last 2 years, we believe, does not make sense. Now with two consecutive quarters of declining real GDP, many are saying we are back in a recession. The charts in the ‘High Frequency Data Tracker’ follow data that are published either weekly or daily, providing a good real-time look at where the economy stands. As of now we believe these measures, along with other monthly economic data coming in, show we are not in a recession.” (First Trust, Dec. 2022)
The economic calendar posted on Calculated Risk is pretty active this week, but the big number is Friday’s payroll numbers for November.
- The consensus is for 200,000 jobs added, and for the unemployment rate to be unchanged at 3.7% (Calculated Risk, Jan. 2023). The month before, there were 263,000 jobs added and the unemployment rate was also at 3.7% (Calculated Risk, Jan. 2023).
Atlanta Fed’s GDPNow remains at 3.7% for expected growth in the fourth quarter of 2022 (Jan. 2023). 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
- Cryptocurrency prices dropped (again) last week as Santa Claus was unable to rejuvenate the market (CoinMarketCap, Dec. 2022). Bitcoin dropped 1% to just under $16,600 and Ethereum fell 1% to $1,215 (CoinMarketCap, Dec. 2022). Litecoin and Uniswap managed positive returns (CoinMarketCap, Dec. 2022). Prices are technically higher since the new year! (CoinMarketCap, Dec. 2022)
- 2022 was a year worth forgetting for most assets, and particularly Crypto (Arcane Research, Dec. 2022). The year started with the war in Ukraine and sizeable industry hacks, then Three arrows capital and Terra/Luna rattled markets (Arcane Research, Dec. 2022). Often forgotten was the much-anticipated Ethereum merge in the third quarter, quickly overshadowed by the still unraveling FTX saga (Arcane Research, Dec. 2022). All of this while the Federal Reserve was raising interest rates at their fastest pace ever (Arcane Research, Dec. 2022). Bitcoin ended the year -65% (second worst on record), Ethereum dropped -69% (Arcane Research, Dec. 2022). Most publicly traded companies did even worse than Bitcoin (Arcane Research, Dec. 2022).
- Despite the horrible year, digital asset ETFs gathered $300+ million in assets (ETF.com, Dec. 2022). Mostly due to new launches and a chunk in the short Bitcoin ETF, but hey we’ll take it! (ETF.com, Dec. 2022)
“All success is a lagging indicator.” ~ Ryan Holiday article on ryanholiday.net, December 29, 2022.
Fun article on what to ask sales professional about their product/services: “Given that sales culture is ripe with conflicts-of-interest between buyers and sellers, most people aren’t asking the critical question. Which is ‘why isn’t your product more expensive?’” (FortunesandFrictions.com, Dec. 2022). The addendum to the December 13 article also included these questions to ask investment wholesalers:
- Can you describe an investor who should not buy this product?
- At what price point would this product be so expensive that you’d no longer recommend it?
- At what price point is this product so cheap that it no longer generates profits for your company?
- Which of your direct competitors do you admire the most, and why?
Wow. On this week’s Orion’s The Weighing Machine podcast we talk to Kurt Brown, the CIO at TownSquare who is now in charge of Orion’s Outsourced Chief Investment Officer (OCIO) services. If you know Kurt, you know this podcast is packed with inspiration and energy. If you don’t know Kurt, you should listen to this podcast! He has a clear vision on the industry, the markets, and life.
2023 Predictions from the “Wealth Manager Tech Spend to Surge” December 25, 2022 article in The Wealth Advisor: “…the promise of long-term improvement in cost to serve and efficiency gains will likely win over boards eager to safeguard a division that has shown itself able to generate attractive profits like it did during 2021. Expect to see a return to double-digit IT spending growth.”
“Daniel Crosby: 5 ways to improve client conversations” from CityWire on July 28, 2022.
2022 was a tough year, but there was a bright side to 2022 (Wall Street Journal, Dec. 2022). Hat tip to Tim Holland of Brinker Capital for finding this WSJ article. A lot of goodies in this article.
What were the top breakthroughs of 2022? (Diamandis.com, Dec. 2022). And how do they compare to the top breakthroughs of 1922, 100 years ago? Big breakthroughs in seven categories: Space, Energy, Health, Food, Robotics, Quantum, and AI (Diamandis.com, Dec. 2022).
Here are eight business ideas you can start now (for free) with ChatGPT, from Syed Huq’s Tweet on December 27, 2022.
Here’s another summary of the recently signed Secure Act 2.0 after it passed both House and Senate (CNBC, Dec. 2022). It makes changes to the retirement system that build upon those in the Secure Act of 2019. Notable high level retirement provisions in the legislation include:
- Mandatory 401(k) enrollment for employees with more than 10 workers (CNBC, Dec. 2022).
- Increasing the age when required minimum distributions (RMDs) must start to 73 in 2023 and then to 75 in 2033 (CNBC, Dec. 2022).
- Reducing the penalty for failing to take RMDs from the current 50% to 25%, and in some cases 10% (CNBC, Dec. 2022).
- Allowing for older retirement savers to make larger catch-up contributions (CNBC, Dec. 2022).
- Increasing the options for employers providing 401(k) matches (CNBC, Dec. 2022).
- Improving worker access to emergency withdrawals from their retirement accounts (CNBC, Dec. 2022).
- Giving part-time workers increased access to retirement accounts (CNBC, Dec. 2022).
- Changing the RMD rules for Roth 401(k) accounts (CNBC, Dec. 2022).
Thanks for reading and have a great week! As always, please let us know what we can do better at email@example.com or firstname.lastname@example.org. Invest well and be well.
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