Hope you had a wonderful weekend. It was action-packed here, including football games, hockey games, and road races.

Entering the new week, it will be a big week for earnings featuring Apple, Microsoft, Alphabet and Amazon (CNBC, Oct. 2022).

The US stock market had another nice gain last week (Morningstar, Oct. 2022). The S&P 500 gained nearly 5%, with over 2% just on Friday (Morningstar, Oct. 2022). The odds are increasing for a nice quarter given the various short-term tailwinds including seasonals, sentiment, and election cycle (Morningstar, Oct. 2022). For the S&P 500, it appears we have a nice floor at the price level 3500 (Morningstar, Oct. 2022).

Remarkably, energy stocks are up nearly 20% this month, with value stocks up about 7% (Morningstar, Oct. 2022). The S&P 500 is up about 5% (Morningstar, Oct. 2022). Despite the strong outperformance of value over growth this year, growth stocks still have the relative performance lead in 3- (and longer) time frames (Morningstar, Oct. 2022).

The interest rate backdrop remains fascinating. This year’s moves have been historic (Yahoo! Finance, Oct. 2022). Consider 10-year Treasury yields started the year essentially at 1.50% and now we’re getting closer to 4.50% (Yahoo! Finance, Oct. 2022). That’s amazing, but – just for the sake of possibility thinking – consider if we have a similar move in the year ahead. That would mean 10s at 7.50%. Not probable, but possible.

  • Last week Ten-year Treasury yields finished at 4.21% (up another 20 basis points over the last week); the highest yield last week was 4.33% (Yahoo! Finance, Oct. 2022).
    • The 10-year yield has now risen for the 12th straight week; it’s at its highest levels since 2008 (Yahoo! Finance, Oct. 2022).
  • The yield to maturity on the Bloomberg Aggregate Bond Index also rose last week to 5.11%, as of October 21, 2022 (up 13 basis points) (Bloomberg, Oct. 2022).
  • The average money market yield rose another 5 basis points last week, finishing at 2.80% as of October 21, 2022 (Crane Data, Oct. 2022). What’s your cash yielding?
  • The average 30-year fixed mortgage rate increased to 7.20% (up 12 basis points) last week (Bankrate, Oct. 2022).
October has the reputation of being a “bear market killer”. Well, since 1971, the most bear market bottoms have in fact happened in October (Stock Traders Almanac, Oct. 2022).

Deeper Dive

Last week we mentioned how, so far, this is only the third year since 1926 where both stocks and bonds are down so much so far (Bloomberg, Oct. 2022). What happened after the last two times (1931 and 1969)? On average, the stock market was up 7% the next year and had a total return of +50% over the next three years (Bloomberg, Oct. 2022).

According to Morningstar, "TINA Is Dead" (Oct. 2022). “Thanks to rising bond yields, the era of `There Is No Alternative’ besides stocks for income is finally over.” (Morningstar, Oct. 2022)

Strategas on investment flows: “A traditional 60/40 portfolio is down -21% YTD, yet ETFs continue to see strong inflows with equities at +$290 Bn (on pace for second most in history) and Fixed Income sitting at +$132 Bn.” (Strategas, Oct. 2022)

The latest BofA Global Fund Manager Survey came out October 25, 2022 and is loaded with nuggets, but here’s one that really pops out. Yes, investors are really, really bearish, but that doesn’t mean they’re selling stocks – yet (BofA Global Fund Manager Survey, Oct. 2022). Advisors are doing their job or investors are becoming steadier investors or both, but this is also a reason why some think we haven’t seen a bottom yet in stock market prices – investors truly haven’t capitulated yet (BofA Global Fund Manager Survey, Oct. 2022).

Another great (though in my opinion exaggerated) bullet from the BofA Global Fund Manager Survey was that it showed the “highest allocations to cash since 2001” (Oct. 2022). On this point, however, while it’s technically correct, I would say it’s a bit extreme. Cash is now at 6%+, compared to long-term average just under 4% (BofA Global Fund Manager Survey, Oct. 2022).

Here’s another plus for the economy. Consumer financial strength remains strong at least according to FICO scores as posted by @zerohedge in a Twitter post on October 17, 2022.

Given the strong dollar this year, international stocks are underperforming US stocks again this year. So, why even bother with international? Well, BlackRock has a fascinating two-pager titled “International stocks: why bother?” that shows that US and non-US stocks can perform dramatically different over time (Jan. 2022).

Another tidbit from the Blackrock piece that’s fascinating is that, in short, when 10-year US returns are below-average, non-US stocks have a powerful tendency to outperform (BlackRock, Jan. 2022).

Speaking of international, there’s been a lot of bad news on Europe lately. Europe is now on sale! According to the latest Orion Portfolio Solutions (OPS) Chart Pack which was published last week. Over the last 20+ years, Europe has traded at a 23% discount to the global market (OPS, Oct. 2022). It’s now trading at a 35% discount, which is one standard deviation below the average valuation for the first time in over 10 years (OPS, Oct. 2022).

Key economic data last week included:

  • Industrial Production: “Factory activity surprised to the upside in September, hitting a new record high and signaling that the US economy is not yet in a recession.” (FirstTrust, Oct. 2022)
  • Existing Home Sales: Existing home sales declined 1.5% in September and are down 23.8% versus a year ago (FirstTrust, Oct. 2022).
    • The median price of an existing home fell to $384,800 in September (not seasonally adjusted) but is up 8.4% versus a year ago (FirstTrust, Oct. 2022).
Short-term housing prices have been getting softer, but Zillow is expecting that housing prices will stabilize soon, per a Twitter post by @GrantStephan on October 18, 2022.

The Atlanta Fed’s GDPNow‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) increased by another basis point last week to a current estimate of 2.9% for third-quarter 2022 GDP, as of October 19, 2022.

As for the economic calendar posted by Calculated Risk this week, the advance estimate for GDP will be released Thursday, and the University of Michigan’s consumer sentiment index will be released on Friday.

As for earnings, third-quarter earnings according to I/B/E/S earnings data from Refinitiv:

  • The 22Q3 Y/Y blended earnings growth estimate is 3.1%. If the energy sector is excluded, the growth rate for the index is -3.5%. (Refinitiv, Oct. 2022)
  • Of the 99 companies in the S&P 500 that have reported earnings to date for 22Q3 74.7% reported above analyst expectations. This compares to a long-term average of 66%. (Refinitiv, Oct. 2022)
  • The 22Q3 Y/Y blended revenue growth estimate is 9.9%. If the energy sector is excluded, the growth rate for the index is 6.8%. (Refinitiv, Oct. 2022)
Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager
  • Cryptocurrency prices were generally positive last week, following macro strength on Friday and then an early afternoon jump on Sunday (CoinMarketCap, Oct. 2022). Bitcoin was higher by 1.6% at around $19,500, and Ethereum jumped 3.5% to trade near $1,330; Cardano and Solana fell, but Polygon, Avalanche, and Uniswap rose (CoinMarketCap, Oct. 2022).
  • Fidelity is launching Ethereum trading for institutional clients and Mastercard is going to help banks enable crypto trading (Decrypt, Oct. 2022). Up to 72% of customer funds from bankrupt lender Voyager could be recovered if the FTX sale is approved (Decrypt, Oct. 2022). Tesla’s third quarter earnings showed no change to their bitcoin holdings, seen as a positive given the large sales in previous quarters (Decrypt, Oct. 2022).
  • No new digital asset ETFs this week, but the US Chamber of Commerce did rip into the SEC for denying Grayscale’s proposed Bitcoin ETF conversion (Arcane Research, Oct. 2022).
Additional Resources

“The growth of the Internet will slow drastically. Most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s,” wrote Nobel Prize winning economist Paul Krugman in a Red Herring magazine article in 1998.

From the State Street Global Advisors (SSGA) Survey results released in September 2022:  “Investors Placing Greater Value on Their Financial Advisors’ Guidance Amid Uptick in Market Volatility; Nearly Half of Millennials Believe Now Is a Good Time to Invest in The Market.”

  • Nearly nine-in-ten investors say their financial advisor has helped them remain confident in this period of rising inflation and market volatility (SSGA, Sept. 2022).
  • Millennials are significantly more comfortable with the highs and lows of the financial markets than Generation X (Gen X) and Boomers (SSGA, Sept. 2022).
  • Generation X is least likely to work with an advisor (SSGA, Sept. 2022).
In the October 2022 Orion webinar focused on Orion Risk Intelligence and called “Help You Sell Series: Grow Your Profits Exponentially with the Clients You Already Have”, there was a quote worth repeating: “According to research from Bain & Company, ‘In financial services…a 5% increase in customer retention produces more than a 25% increase in profit.’” 

Last week’s Orion's The Weighing Machine podcast was with Glenn Dorsey from Clark Capital who addressed the top concerns of investors today. This week’s podcast (released each week early Tuesday morning) will be a keeper and good resource for many advisors. It’s with Brett Van Bortel from Invesco Consulting – on how to retain top clients! I watched Brett present at a Main Management conference. The advisors did a lot of head nodding and took a lot of notes during his presentation.

The first monthly OPS "Weighing The Risks" podcast has been published. It’s like the old Hidden Levers webinars where we review various scenarios that could play out in the economy and markets. The first edition is about the mid-term election and the special guest star is Matt Bartolini from State Street Advisors. The next one (publishing in about three weeks) will be on Geopolitics. Check it out and please let us know what you think of the inaugural episode of Weighing The Risks.

Seems like everybody is catching a cold these days: 9 things doctors do when they feel a cold coming on (LiveStrong, Oct. 2021).

There's still time to secure Series I bonds paying 9.62% for six months according to the “How to get the ‘best of both worlds’ for Series I bond interest rates before November” article from CNBC (Oct. 2022).

That said, in an October 18, 2022 article, from the original “Bond King” Bill Gross, he mentions a favorite holding: “iShares 0-5 Year TIPS Bond ETF” with the NYSE stock symbol of “STIP” (BlackRock, Oct. 2022).

About that five-year gender longevity gap, it actually goes away at age 65. “A recent report from BlackRock highlights the five-year difference in lifespan between men and women. While the gap between men and women sounds dramatic, advisors should be aware that the gap is much smaller for their retirement-age clients. A narrower gender gap has important planning implications.” (ThinkAdvisor, July 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.

   

2022-OPS-10/25/2022

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/.

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