Weekly Market Bullets with Rusty Vanneman, CFA, CMT, Vol. 94

Investment Strategy | November 29, 2022

BY Rusty Vanneman, CFA, CMT, BFA

Welcome back from the long Thanksgiving weekend. We’re now entering the home stretch of this historic and “unprecedented” year for the markets and economy in so many ways. Five weeks remaining in 2022!

Ben and I are thankful that these Bullets have been useful to so many these past few years. We hope you continue to find these Weekly Bullets to be useful for: quickly and simply understanding key global market drivers and catalysts; finding out what’s working with investors/advisors; grabbing a few possible conversation starters; and maybe even cracking a smile or two while doing some of your early week “prep” reading. Our goal is that these Weekly Bullets will provide useful information, a valuable opinion, and perhaps even change the way you think about a topic. Either way, our goal is to help investors stay invested and stay diversified.

We’re starting the week on the weaker side in prices as protests in China (on the latest uptick in COVID cases) weigh on sentiment and, in turn, increase concerns over supply chains (like for Apple (AAPL)) (CNBC, Nov. 2022). The 10-year yield is down below 3.7% (CNBC, Nov. 2022).

Despite a short trading-week last week, the overall US Market managed to gain nearly 2% (Morningstar, Nov. 2022). Gains were led by value stocks at just over a 2% gain (Morningstar, Nov. 2022).

Value stocks are continuing to crush growth stocks (by Morningstar indices) over all short-term time frames this year (1-mo, 3-mo, 6-mo, YTD, 1-Yr) and are edging growth stocks by nearly 1% per year on the 3-year time frame (Morningstar, Nov. 2022).
Growth stocks are still holding out its edge over value by about 2% per year on the 5-and-10-year time frames (Morningstar, Nov. 2022).

According to BeSpoke Investments, a week ago marked the one-year anniversary of the Nasdaq’s last all-time closing high (BeSpoke, Nov. 2022).

Following prior periods where the Nasdaq first dropped 30% over a trailing 12-month period, the US economy was already in or within a few months of a recession (BeSpoke, Nov. 2022).
Declines of 30% for the Nasdaq don’t shed a positive light on the economic prospects for the US economy, but forward returns following prior declines of this magnitude have been better than average (BeSpoke, Nov. 2022).

Despite the over-all market being down 16% this year and 15% over the last 12 months, value stocks are up nearly 3% year-to-date and up over 4% over the last year (Morningstar, Nov. 2022). Among major asset classes, commodities are up 18% YTD and 13% over last year (Morningstar, Nov. 2022). The US dollar is up 11% YTD (Morningstar, Nov. 2022).

Key interest rates:

Last week Ten-year Treasury yields finished at 3.69% (down 13 basis points from last week) (Yahoo Finance, Nov. 2022). The highest yield last week was 3.83%; the low was 3.68% (Yahoo Finance, Nov. 2022).
The yield to maturity on the Bloomberg Aggregate Bond Index came down last week to 4.68%, as of November 25, 2022 (down 10 basis points) (Bloomberg, Nov. 2022).
The average money market yield continued to rise, another 1 basis point last week, finishing at 3.46% as of November 26, 2022 (Crane Data, Nov. 2022).
The average 30-year fixed mortgage rate continued its decline off recent highs, now down to 6.81% (Bankrate, Nov. 2022).

Deeper Dive

Did you know? That the spread between the 30-year fixed rate mortgage and the 10-year Treasury has averaged 1.78% over the last 25 years, so the current spread of 3.12% is near historic wides (according to a LinkedIn post by David Kelly on November 22, 2022)? This compares to the 1.60% at the end of last year that was unusually tight (David Kelly, Nov. 2022).

PIMCO makes a case for “Risk Off, Yield On” in its November Asset Allocation Outlook – and don’t give up on fixed income given how much more attractive yields are than they were a year ago (PIMCO, Nov. 2022). An example from a PIMCO chart in the Outlook includes Bank Loans which currently have a yield of 9.3% when they started the year at 3.9% (PIMCO, Nov. 2022). Higher starting yields sure help expected returns moving forward!

When it comes to the short-term rates, and what many stock market observers are watching, what do the markets currently think of Fed policy, according to the CME Group’s FedWatch Tool?

For the December 14 Fed meeting, it is now a 75% chance for a 50 basis point hike: 25% chance for a 75 basis point hike (CME Group, Nov. 2022). Really no change in those numbers week over week.
Looking out to next March, the market is currently estimating a terminal Fed Funds rate that is 1.00 to 1.25% from where it is now (3.75-4.00) (CME Group, Nov. 2022).
In general, a potential pause in rate hikes in May and the potential for actual rate cuts in November 2023 (according to Charlie Bilello’s Tweet on November 19, 2022).
Are these expectations too optimistic? We need better inflation data to make these expectations reality.

The new Orion Portfolio Solutions (OPS) Quarterly Reference Guide is out! This 60+-page document includes many good learning points, including a graphic showing the largest gains/losses for stocks and bonds over various holding periods since 1950.

WisdomTree on US vs International in its A Decade Plus Long Run Outperformance for US Stocks post: “By some measurements, we are now more than 15 years into one of the most pronounced, long-lasting periods of U.S. equity outperforming international stocks in recent history. Since the 1970s, the relative performance of U.S. versus international equities has been cyclical, and these cycles have lasted, on average, around five years. While it is impossible to predict the exact timing for when the current trend will reverse, one could certainly make the argument that international stocks may soon have their moment in the sun.” (WisdomTree, Nov. 2022)

It’s that time of year when investment firms roll out their long-term expected returns, otherwise known as Capital Market Assumptions (CMAs). This includes GMO’s 7-Year Forecast which is one (of many) firms looking for international stocks to outperform (GMO, Nov. 2022).

Good start to holiday shopping, at least Black Friday online sales top $9 billion in new record (CNBC, Nov. 2022).

Last week’s economic data point was a pleasant surprise in New Home Sales, according to the First Trust Data Watch on November 23, 2022. Lower mortgage rates of late are helping.

Sales were higher than expected at 632,000 (vs consensus estimate of 570,000) (First Trust, Nov. 2022).
The median price of new homes sold was $493,000 in October, up 15.4% from a year ago (First Trust, Nov. 2022). The average price of new homes sold was $544,000, up 11.5% versus last year (First Trust, Nov. 2022).

The economic calendar published by Calculated Risk this week is jam packed:

Tuesday, November 29: Case-Shiller US Home Price Index
Wednesday, November 30: Job openings and job quits
Thursday, December 1: Initial jobless claims
Thursday, December 1: PCE and Core CPE
Friday, December 2: Nonfarm payrolls and unemployment

Despite all the concerns about economic weakness in the near future, it should be noted that this quarter is looking great so far. The Atlanta Fed’s GDPNow‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) for Q4 2022 is currently up to 4.3% as of November 23, 2022. This is impressive.

Third-quarter 2022 earnings season is almost over. Third-quarter earnings according to I/B/E/S earnings data from Refinitiv.

22Q3 Y/Y earnings are expected to be 4.3%; excluding the energy sector, the Y/Y earnings estimate is -3.5% (Refinitiv, Nov. 2022).
Of the 485 companies in the S&P 500 that have reported earnings to date for 22Q3, 70.7% have reported earnings above analyst estimates (Refinitiv, Nov. 2022). This compares to a long-term average of 66.2% and prior four quarter average of 78.1% (Refinitiv, Nov. 2022).
During the week of November 28, nine S&P 500 companies are expected to report quarterly earnings (Refinitiv, Nov. 2022).
In the end, good numbers, but most still expect weaker earnings numbers in 2023 (Refinitiv, Nov. 2022).

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

Cryptocurrency continued their stabilization/rebound from the FTX saga last week. Bitcoin was flat on the week, hovering around $16,600; Ethereum rebounded 3.4% to $1,200; Solana recovered by jumping 12%, and Dogecoin popped 30% (Decrypt, Nov. 2022).
News flow was thankfully much quieter last week in the digital asset world. FTX news continues to come out as bankruptcy hearings begin (Arcane Research, Nov. 2022). Binance allocated another $1 Billion for its crypto recovery fund aimed at supporting the industry (Arcane Research, Nov. 2022). Eyes are on crypto lender Genesis, for possible bankruptcy, as it deals with FTX exposure (Arcane Research, Nov. 2022).
The Osprey Bitcoin Trust (OBTC) published proof-of-reserves to prove its fund is backed 100% by Bitcoin, while the largest fund in the space, Grayscale Bitcoin Trust (GBTC), has not published anything due to difficulties in the process (but Grayscale and independent research reassures that its fully collateralized) (ETF.com, Nov. 2022). Regardless, the discount on GBTC continues to widen – despite ARK investment management adding to their holdings (ETF.com, Nov. 2022). No new crypto ETF launches.

Additional Resources

Another short and juicy tweet from Charlie Bilello on November 19, 2022, this time on Bitcoin annual returns since 2010. A lot of big numbers in there – and maybe a reason for hope for the crypto advocates?

“An attitude of gratitude creates blessings.” ~ Sir John Templeton (GoodReads, Nov. 2022).

Hear about the new holiday? It’s one I can celebrate – National Investment Risk Management Day, with its inaugural day of celebration on January 19, 2023. OPS Strategist Toews Asset Management is championing this new holiday.

Speaking of boutique firms on OPS, it should be noted that boutique firms are indeed outperforming in terms of total returns and risk-adjusted performance this year. On that note, turn into this month’s Portfolio Webinar called “Diversified Boutique Portfolio Recipe” with AAMA’s Bob Baker and Main Management’s Kim Arthur.

Last week’s Orion’s The Weighing Machine podcast was with yet another strong boutique firm on OPS – Ocean Park’s new CIO James St. Aubin and co-founder Dr. Ken Sleeper. We talked about a lot of things, including the current fixed income markets. It’s true that the bond market has been a hot topic with many investors and advisors these days, so this week’s podcast is even more fixed income with the Capital Group’s (American Funds) Colleen Ambrose. If you haven’t done so already, please subscribe/follow the podcast. Thanks for listening!

From February 27 – March 2, you’re invited to join Orion at the World Center Marriott in Orlando, Florida for our Ascent 2023 Conference, where we’ll show you how to get even more out of the tech you already love, with 1:1 consultations, deep dive workshops and hands-on training sessions. The lineup of keynote speakers and musical guests will deliver inspiration, education, and entertainment you won’t want to miss.

Revisit the classic Tweedy, Browne’s “What Has Worked in Investing” from AAII in April 2011 – written just before the decade-long-plus outperformance by Growth (up until the last year)!

WisdomTree has been running a series on the “Four Habits of Successful Advisors”, which includes what investors and advisors are seeking:

End clients view professional investment management as “table stakes”—that is, it is viewed increasingly as a commodity (WisdomTree, Nov. 2022).
End clients are more cost/value/tax sensitive (WisdomTree, Nov. 2022).
End clients are increasingly interested in/open to more nontraditional investment approaches and solutions (WisdomTree, Nov. 2022).
Advisors seek to build enterprise value in their firms through scale and efficiency (WisdomTree, Nov. 2022).
Advisors want to deliver institutional-quality investment portfolios while being able to focus on holistic wealth management advice—the services end clients are increasingly willing to pay for (WisdomTree, Nov. 2022).
Advisors are increasingly open to outsourcing as a means of driving scale and efficiency in their practices (WisdomTree, Nov. 2022).

Some “By The Numbers” from leading industry publication Ignites on November 22, 2022:

90%: The proportion of asset managers who said actively managed ETFs will be a product development focus in the year ahead, according to Fuse Research Network (Ignites, Nov. 2022).
78%: The percentage of Ignites poll respondents who said they are feeling burnt out (Ignites, Nov. 2022).

Scott Galloway’s 8-minute video on YouTube from a few weeks ago regarding Advice To People Entering Their 30’s.

“The Seasonality of Weight Gain” by Philip Pearlman on Prime Cuts from November 23, 2022 shows that these three days alone account for the majority of the weight adults gain annually in the US: Thanksgiving, Christmas, and New Year’s Eve.

“Every Song With Over 1 Billion Spotify Streams” by Marcus Lu on Visual Capital, November 25, 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.

2300-OPS-11/28/2022

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/.

About Rusty Vanneman, CFA, CMT, BFA

Rusty Vanneman serves as the Chief Investment Officer 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.

Weekly Market Bullets with Rusty Vanneman, CFA, CMT, Vol. 94

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