The stock market is starting the week lower this morning (CNBC, May 2022). In the news department, Monday’s announcement that Europe would ban imports of most Russian oil pushed crude oil prices over 3% this morning (CNBC, May 2022).

Last week the losing streak in the US stock market was finally snapped with a nearly 7% gain (Morningstar Direct, May 2022).  Small cap value led the way (Morningstar Direct, May 2022).

  • Bonds were up nearly 1% and commodities were up almost 3% (Morningstar Direct, May 2022).
  • Bottom line, it was finally a good week for diversified portfolios. It had been a while.
Ten-year Treasury yields ended the week at 2.74% (down 0.05% over the last week and down 0.38% over the last 3 weeks) (Yahoo Finance, May 2022). This was the third week in a row for lower 10-year yields (Yahoo Finance, May 2022).

This month’s returns are also positive at this point for balanced portfolios, though some areas of the market are still down, including US growth stocks and emerging market stocks (both down 3%) (Morningstar Direct, May 2022). REITs (real estate investment trusts) are also down about 5% (Morningstar Direct, May 2022).

Despite last week’s nice gains, the quarter-to-date, the year-to-date, and 1-year returns are mostly negative for US stocks and bonds (CNBC, May 2022).  

  • Over the last 12 months, US stocks are down about 3% and US bonds are down about 8% (CNBC, May 2022).   
  • Markets with gains over the last year include US value stocks (up 6%), alternatives (+1%), and commodities (+45%).
For 3-year returns, at one point last week value stocks were slightly ahead of growth stocks (using Morningstar indices), though by week’s end growth was back ahead by 1.7% (14.0% vs 12.3%) (Morningstar Direct, May 2022). By month-end, and particularly by quarter-end, if value is ahead of growth, that could reshape narratives around investment proposals.

Deeper Dive

Many Americans still have more equity in their house than in the stock market and in turn, there are growing concerns about a housing crash. I’m not in that camp. In short, there is a lot of potential buying power and just not enough new houses (yet) to go around.

Another plus for housing is the average 30-year fixed mortgage rate is now at 5.28% as of May 27 (Bankrate, May 2022). This is down from the high of 5.57% on May 13 (Bankrate, May 2022). 

However, one price that is still going up is the average gas price, which was $4.62 (up 3 more cents from the prior week) as of May 30 (AAA, May 2022).

The average car in the US just hit a record 12.2 years old (The Wall Street Journal, May 2022).

The big surprise in last week’s economic data highlights was that 1Q22 GDP was -1.5% (FT Portfolios, May 2022).

  • Real GDP growth in Q1 was revised slightly lower to a -1.5% annual rate from a prior estimate of -1.4%, missing the consensus expected revision to -1.3% (FT Portfolios, May 2022).
  • The GDP price index was revised up to an 8.1% annual growth rate from a prior estimate of 8.0% (FT Portfolios, May 2022).
  • Nominal GDP growth – real GDP plus inflation – remained at a 6.5% annual rate (FT Portfolios, May 2022).
The next quarter should be better for economic growth. Currently, the Atlanta Fed’s initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) for the second quarter of 2022 is 1.9 (down 0.5 from the week before) (The Federal Reserve Bank of Atlanta, May 2022).

There is a lot of housing and manufacturing data on this week's economic schedule, but the big report is on Friday:

  • May’s Employment Report. The consensus is for 320,000 jobs added, and for the unemployment rate to decline to 3.5% (Calculated Risk Finance & Economics, May 2022).
  • There were 428,000 jobs added in April, and the unemployment rate was at 3.6% (Calculated Risk Finance & Economics, May 2022).
Earnings season is almost over and it’s mostly good news according to the weekly Factset earnings report.
  • For Q1 2022 (with 97% of S&P 500 companies reporting actual results), 77% of S&P 500 companies have reported a positive earnings per share surprise and 73% of S&P 500 companies have reported a positive revenue surprise (Factset, May 2022).
  • Earnings Growth: For Q1 2022, the blended earnings growth rate for the S&P 500 is 9.2%. If 9.2% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q4 2020 (3.8%) (Factset, May 2022).
Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager
  • Cryptocurrency prices were generally mixed last week. Signs of life began to pop up Sunday into Monday, with Bitcoin trading 5% higher over the last 7-days (CNBC, May 2022). Ethereum lagged somewhat, falling by 3.5%. Cardano also notched a gain, but other coins like Solana, Avalanche, and Polygon fell on the week (CNBC, May 2022).
  • The SEC denied a proposal for a spot Bitcoin ETF from One River (Reuters, May 2022). WisdomTree’s Bitcoin Trust and ARK/21Shares currently are the only two spot applications in front of regulators (Coindesk, May 2022). Cryptocurrency exchange FTX announced, or at least mentioned, they are proposing a new clearing model to the CFTC for spot Bitcoin, which may satisfy the needed requirements to eventually approve a spot Bitcoin ETF (Coindesk, May 2022).  
  • ‘LUNA 2.0’ launched and quickly plummeted, an attempt at a new iteration of the algorithmic stablecoin, Terra, and its counterpart Luna (Time, May 2022). Private equity firm a16z launched a $4.5 billion crypto fund – the largest in the space (CNBC, May 2022). A report out by the Federal Reserve estimates that 11% of U.S. adults held or used Cryptocurrency in 2021 (CNBC, May 2022). 
Additional Resources 

Here’s yet another reason for financial advisors – retail investors have been destroyed in recent years trading options.  An excerpt from Mom and Pop Investors Took a Billion-Dollar Bath Trading Options During the Pandemic showed that research from economists at the London Business School found that mom-and-pop day traders managed to lose more than $1 billion during the bull market (Bloomberg, May 2022). The bill climbs to $5 billion when the cost of doing business with market-makers is factored in (Bloomberg, May 2022).

Investor sentiment last week dropped to its second-lowest net reading between Bulls-Bears this year – and its fourth-worst single week reading in over 12 years (AAII, May 2022).

 This week we did something different on Orion's The Weighing Machine podcast.  Given that investor and consumer sentiment is so down these days -- despite the current reality that the aggregate financial condition is at or near the best period of abundance in humankind’s history -- we interviewed the author William B Irvine who wrote the book I’ve probably recommended the most in recent years called "A Guide to the Good Life: The Ancient of Stoic Joy." Bill provided some potentially useful tips and techniques on how to think in various situations, not only in dealing with the markets and making financial decisions but also life in general.

If you want more on Stoic philosophy, arguably Ryan Holiday is the most well-known contemporary Stoic author, including among Silicon Valley and the NFL, and he has an excellent blog.

A hot topic on the podcast circuit is the latest book co-authored by one of my favorite economists Tyler Cowen called Spotting Talent.

One more point about sentiment.  It may not be as dire as some say as U.S. births increase for the first time since 2014 (The Wall Street Journal, May 2022).

This might be the best summer ever for movies, but it’s also a great summer for Orion’s Summer of CE events with three webinars, one in June, July, and August, each qualifying for 1 hour of CE toward the CFP designation.  Orion’s Chief Behavioral Officer Dr. Daniel Crosby will explore the underlying psychology affecting decision-making and the ability to foster stronger relationships in the financial space. The three webinars:  

  • Behavioral Alpha: An Advisor’s Greatest Value 
  • The Science of Influence 
  •  Leadership Begins with you
"If you care too much about being praised, in the end you will not accomplish anything serious.  Let the judgments of others be the consequence of your deeds, not their purpose." Leo Tolstoy from his Daily Calendar of Wisdom.

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. 

0970-OPS-6/2/2022 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/.