The markets should start the week off strong.  As of this writing, prices are up nearly 2% in pre-market trading (CNBC, June 2022).    

Last week, however, was another tough one for the markets as they officially entered bear market status (loss of 20% from prior cycle highs) (CNBC, June 2022). Losses were fueled by the Fed’s aggressive 75 basis point increase in Fed Funds to 1.75% in response to the prior week’s higher than expected CPI (consumer price index) (CNBC, June 2022).    

  • The S&P 500, for instance, lost over 5% last week. It was the steepest weekly drop in the index since March 2020 (CNBC, June 2022).  
  • The S&P 500 has been down 10 of the last 11 weeks (CNBC, June 2022).   
As for the weekly returns and their impact on the year-to-date returns (using Morningstar indices):  
  • The only positive returns from the week came from China at under 2% as well as a slight gain on the US dollar, and short-term treasuries were essentially flat (Morningstar, June 2022). 
  • Growth stocks fell over 5% and are now down over 21% YTD (Morningstar, June 2022). 
  • Value stocks fell over 6% and are now down over 10% YTD (Morningstar, June 2022). 
  • US energy stocks experienced their worst week of 2022, falling over 17%. They are still up over 32% YTD (Morningstar, June 2022). 
  • US Bonds (Aggregate Index) lost under 1%; now down over 11% YTD (Morningstar, June 2022). 
  • Commodities lost over 6% last week: still up over 28% on the year (Morningstar, June 2022). 
Deeper Dive 

The Fed’s 75 basis point move in Fed Funds was the most aggressive since 1994.  It wasn’t that long ago, however, that the Fed was basically providing guidance that a 75 basis point move would NOT happen, but the economic and market data forced the Fed’s hands.   

  • According to the research firm Strategas though, the current pace of hike rates hasn’t been this strong since 1980. “Granted the terminal level in 2022 is still only expected to reach 3.375% (based off the FOMC's dot plot), but the last time that the Committee raised its policy rate by more than 250 bp in a calendar year was 42 years ago, when the yield went from 14.0% to 18.0%.” (Strategas, June 2022)   
While there are clearly cyclical forces that would suggest the market would be under some price pressure of late, the tide will hopefully shift soon.   
  • First, typically during mid-term election years, the stock market tends to be weak in the first half of the year.   
  • Second, this is also the time of the year for weaker seasonals.  
  • In a few months though, those headwinds will become tailwinds.  
  • In addition, it’s also the current view that “peak inflation” is near. While we are likely to continue seeing higher consumer and producer prices in the months/quarters ahead, having peak inflation in the rearview mirror should also be a plus.  
  • How might the investment landscape change after peak inflation? Listen here! Peak Inflation Portfolio Recipe Webinar 
  • This all considered, it’s helpful to remember the stock market looks forward. Investors likely won’t wait until after these events occur but will most likely be improving months in advance.      
At the end of last year, the stock market and the classic 60/40 balanced portfolio had their best 3- and 5-year returns ever (outside of a few years in the late nineties). A step back before the eventual next two steps forward was to be expected at some point. A “pause to refresh” is healthy for the markets. And what a pause it has been, according to Bespoke Investments as of last Thursday:  
  • 60/40 portfolios are down nearly 18YTD on a total return basis, the worst start to a year since at least 1976. That six-month decline makes this the second-worst period for 60/40 portfolio returns since that time (Bespoke Investments, June 2022). 
  • Also, as of last Thursday, three key cyclical sectors have given up all of their post-COVID gains: Consumer Discretionary, Financials, and Industrials. The gains of the last 28 months are gone (Bespoke Investments, June 2022).
It was indeed a tough week last week, but some numbers did get better last week. One example is those advisors who actively look to improve after-tax returns all year, not just in December or the 4th quarter.   
  • Here’s the latest example, according to Orion’s Andy Rosenberger last week. Orion Tax-Managed strategies have realized close to $20 million of losses year-to-date for client accounts.    
From Andy: To put this in perspective, for a newer funded California client in the highest tax bracket, that represents a tax alpha of 12.9%. Even for clients living in states with no capital gain taxes, the tax alpha is approximately 9.5%.” (Tax alpha measures how much an investor can add to their financial plan by optimizing efficient tax strategies, per Smart Asset).   

According to the investment firm Strategas, here are some stats on Bear Markets: 

  • On average, they last 20 months (Strategas, June 2022). 
  • The average market declines are -40% (Strategas, June 2022).  
  • This year’s S&P 500 correction has now exceeded the intra-year average drawdown of 19 percent historically seen in midterm election years (Strategas, June 2022). 
What a week in Ten-year Treasury yields, which in the end finished last week at 3.24% (up 0.08% over the last week and now 50 basis points the last three weeks) (Yahoo, June 2022). The high last week was 3.48%, which is a new cycle high and the highest level since 2011 (Yahoo, June 2022).  Over the last week, I clearly noticed an uptick in questions about interest rates on cash and cash substitutes. Currently, the average money market rate is 0.07% (CNBC, June 2022). Expect that number to increase in the weeks ahead.   

Speaking of money markets, look at this chart – there is a lot of money in cash! That’s an underrated plus for the economy and the markets (FRED, June 2022).  

More stock market history from Strategas: Last week, the S&P 500 had completely erased its 2021 gain of 27%. To put this in historical perspective, only the 1936/1937 period saw a gain of more than 20% in a calendar year (28% in 1936) wiped out by the next year’s decline (-39%) and it took until October 1937 for this to happen. The closest other example was 1973/4, when a 17% advance was followed by a -30% collapse, as the Nifty Fifty market was undermined by the Federal Reserve hiking rates in response to the oil crisis. Since the current environment also combines a prior bull market with narrow leadership centered around technology (companies like Xerox were considered revolutionary 50 years ago), and a Federal Reserve fighting an unforeseen inflation shock driven partly by a surge in energy prices it is worth looking at the comparison of YTD performance to 1973/4. (Strategas, June 2022).   

Another history lesson from Strategas: Getting back to the Fed raising rates the most at once since 1994 (a day, by the way, I remember quite well!), what did the stock and bond markets look like then? In short, according to Strategas, stocks were volatile and mostly ran in place – until bond yields started to move lower again. Then, stocks took off (Strategas, June 2022).   

One more thing about 1994: The bond market's current loss is 3x larger than its worst year ever – in 1994 (Abnormal Returns, June 2022).   

Finally, a price drop. The average gas price moved down to $4.98 (down 3 cents from the prior week) as of June 20, 2022 (AAA, June 2022).   

Regarding last week’s economic data: 

  • The Producer Price Index (PPI) rose 0.8% in May (CNBC, June 2022). 
  • Producer prices are up 10.8% versus a year ago (CNBC, June 2022). 
  • Housing starts declined 14% in May, according to First Trust. This report is loaded with interesting facts, including that housing starts posted the largest monthly decline since the early days of the pandemic.  
  • That said, part of the decline was the result of April’s reading on construction being revised up to the highest level since 2006.  
  • It makes sense to slow down the pace of starts given how many projects are currently sitting in the pipeline. The number of homes already under construction is at the highest level on record back to 1970.
  • Moreover, the gap between the number of units under construction and the number of completions of new homes remains at record high levels back to 1970s as well.  
  • Bottom line, and a plus for GDP, given that residential investment is counted in GDP when units are completed, housing can continue to be a tailwind for economic growth even with a slowdown in the headline pace of housing starts given current conditions.    
Inflation expectations are dropping though. This is encouraging. These are market-based 5-year inflation expectations (FRED, June 2022).  

Technically, the odds of a recession are indeed increasing. From where I sit, given the strength in the labor and housing markets, along with the strength of the US consumer (albeit all three are showing some cracks), it doesn’t seem likely to me. But the data is the data and the latest Atlanta Fed’s GDPNow ‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) for the second quarter of 2022 is now at 0.0 (down 0.9 over last week) as June 16, 2022. The official first quarter estimate stands at -1.5%. Two consecutive quarters of real GDP contraction typically means recession (Atlanta Fed GDPNow, June 2022). 

Additional Resources  

In October 2021, Americans’ legal betting was up 24x in just the last three years (The Prof G Show – Scott Galloway, June 2022). 

  • In June 2018, U.S. sports gamblers wagered $310 million, and all of those bets were placed in person at betting parlors (The Prof G Show – Scott Galloway, June 2022). Then the Supreme Court made it possible for legal gambling to reach the internet. \In October 2021, sports gamblers wagered more than $7 billion, and 84% of those bets were placed online (The Prof G Show – Scott Galloway, June 2022).   
And, if you have this itch, check out this website: Kalshi. Besides, I love prediction markets. It’s not just words people are saying, but money they’re investing that is setting prices. One stat that Ben and I think is incredible is the current price that a recession will officially occur by 2nd quarter of 2022 – it’s basically 96%. Yes, the odds of a recession are higher than they were, but 96%? Seems like a short to us.    

Housing data and Fedspeak on this week's economic calendar (Calculated Risk, June 2022). Fed Chair Powell has testimony on Wednesday and Thursday.    

Here’s an important stock market stat (at least to McDonald’s fans): the S&P has higher returns when the McRib is available (DollarsandData, June 2022)! Is there a correlation between the happiness of eating a McRib and buying stocks?     

“Don’t bet on the end of the world – it only happens once.” Legendary floor trade Art Cashin (hat tip to Kurt Brown).  

This week on Orion's The Weighing Machine podcast we hear from long-time Orion/FTJ friend Herb Morgan, the founder and CIO of Efficient Market Advisors. Several times in my career I had the misfortune to be on a panel with Herb and he always stole my thunder! He nails it on this podcast too. His experience, energy, and thoughtful approach to investing stand out.    

The ability to spot financial baloney predicts financial well-being. This is the conclusion from these psychology and economics researchers behind the paper: Individual Differences in Susceptibility to Financial Bullshit.   

Here’s one take on the world’s best inflation hedge. In short, the world’s best inflation hedge is having highly sought-after skills that give you leverage in the labor market. “Stocks and crypto might be in bear markets, but the bull market for quality talent never ends.”  

On that point, how to potentially future proof your career. The conclusion is that “the more we can employ curiosity to learn what is changing, how it is changing, and what it means, the better we and our careers will be prepared to thrive.”  

And one more good one on who will likely professionally win in the years ahead. It’s not about memorization and simply being resourceful anymore.   

Last week I mentioned the new Philly sports movie. This week, I’ll mention a classic “Nebraska sports movie.” Did you know the 'Bushwood Country Club' was supposedly in 'Nebraska' (though it was actually filmed at the Rolling Hills Golf and Tennis Club, which is now the Grande Oaks Golf Club about 10 miles from downtown Fort Lauderdale?) One of the many scenes at the Bushwood Club in Caddyshack. 

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. Have a great week!   Invest well and be well. 

1110-OPS-6/24/2022 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/.