There were some positive developments out of beleaguered UK over the weekend and nothing really of note from China (at least not yet). It’s a big week of earnings (including Bank of America, Goldman, Tesla, Netflix, IBM, J&J, Verizon and Procter and Gamble) but, then again, isn’t every week a big week? (CNBC, Oct. 2022)

Despite some mid-week strength, including an impressive “reversal day” on Thursday, last Friday’s loss of more than 2% pushed the weekly return negative (-2% for the week) (Morningstar, Oct. 2022).

  • Value stocks did finish the week higher though, up nearly 1%; growth stocks lost more than 4%. (Morningstar, Oct. 2022)
YTD Return Highlights:
  • S&P 500 is down about 24% (Morningstar, Oct. 2022).
  • Growth stocks are down about 39% (Morningstar, Oct. 2022).
  • Value stocks are down about 11% (Morningstar, Oct. 2022).
For the year, the asset classes with gains are Commodities (~16%) and Cash (~1%); Energy remains the only positive sector at about +22% (Morningstar, Oct. 2022).

Deeper Dive

Quite a week again for interest rate volatility last week, including these headlines:

  • Last week Ten-year Treasury yields finished at 4.01% (up another 13 basis points over the last week); the highest yield last week was 4.08%—that was a 15-year high (Yahoo! Finance, Oct. 2022).
    • The 10-year yield has now risen for the 11th straight week, continuing its longest streak since the 1970s (Yahoo! Finance, Oct. 2022).
  • The yield to maturity on the Bloomberg Aggregate Bond Index also rose last week to 4.98%, as of October 14, 2022 (up 20 basis points) (Bloomberg, Oct. 2022).
  • The average money market yield rose another 4 basis points last week, finishing at 2.75% as of October 14, 2022 (Crane Data, Oct. 2022).
  • The average 30-year fixed mortgage rate increased to 7.08% (up 19 basis points) last week (Bankrate, Oct. 2022).
  • Mortgage rates hit highest rates in 20 years (Barron’s, Oct. 2022).
How bad a year has it been for balanced portfolios so far? In short, it’s been one of the worst years for 60/40 performance ever—see Charlie Bilello’s chart on “60/40 Portfolio: S&P 500/US 10-Year Treasury” in his October 16 twitter post.

There’s yet another visual way to see how bad this year has been—see the Bloomberg chart The Coogi Capitalist posted on “US Stocks vs Bonds Returns 1926-2022” in an October 14 twitter post. So far, this is only the third year since 1926 where both stocks and bonds are down so much and so far (Bloomberg, Oct. 2022).

Another asset class higher this year (besides Commodities and Cash) is the US dollar—it has been on fire this year (BeSpoke, Oct. 2022). What does this typically mean for the US stock market performance three and twelve months later? According to BeSpoke Investments, 3-month returns can remain positive, but the 12-month returns are negative on average (Oct. 2022). A stronger dollar can be a headwind for future aggregate earnings (BeSpoke, Oct. 2022).

What to keep in mind and expect from the inflation data moving forward according to JPMorgan Asset Management’s David Kelly in his LinkedIn post on October 10, 2022:

  • “Core CPI inflation may fall more slowly. It must be emphasized that shelter accounts for almost 42% of core CPI and the owners’ equivalent rent part of this accounts for more than 30% of core CPI on its own.  Both actual rent and owners’ equivalent rent lag the rest of CPI very significantly as they track the increase in rental costs for both new and existing leases. Even when new lease rates begin to fall, the year-over-year change in existing lease rates can remain positive. Recent research by the Dallas Federal Reserve suggests that the year-over-year increase in both actual rent and owners’ equivalent rent won’t peak until the middle of 2023* at levels of close to 8% year-over-year.” 
Here’s a couple “Did you know?” stats in a Market Insider article on October 8, 2022:
  • Did you know that the market cap of Tesla is the same as the entire European banking sector?
  • Did you know that the market cap of US equities as a percentage of the MSCI World Index just hit a new record high of 66%?
Value stocks have outperformed this year, but they’re still on sale given historical relative valuations according to this John Authers article from October 9 where he quotes the latest QMO quarterly (Bloomberg, Oct. 2022).

Key economic data last week included CPI, which came down year over year, but showed a monthly increase; Core CPI is now at its highest level in 40 years (Bloomberg, Oct. 2022).

The Atlanta Fed’s GDPNow‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) increased by a few basis points last week to a current estimate of 2.8% for Q3 2022 GDP, as of October 14 (GDPNow, Oct. 2022).

As for the economic calendar posted on Calculated Risk’s blog this week, the Fed will release the Industrial Production and Capacity Utilization data on Tuesday, and Existing Home Sales will be released Thursday.

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

  • 22Q3 Y/Y earnings are expected to be 3.6%. Excluding the energy sector, the Y/Y earnings estimate is -3.1% (Refinitiv, Oct. 2022).
  • Of the 35 companies in the S&P 500 that have reported earnings to date for 22Q3, 68.6% have reported earnings above analyst estimates; this compares to a long-term average of 66.2% and prior four quarter average of 78.1% (Refinitiv, Oct. 2022).
  • During the week of Oct. 17, 66 S&P 500 companies are expected to report quarterly earnings (Refinitiv, Oct. 2022).
Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager
  • Another flat-to-down week for cryptocurrency prices. Bitcoin dropped 1.4% to just over $19,000; Ethereum fell 1% to under $1,300. Most other large coins fared worse, with Ripple and Cardano falling double digits. (DeCrypt, Oct. 2022)
  • Google/Alphabet has partnered with Coinbase to offer crypto payments and enabled Ethereum address search capabilities. Bitcoin’s mining difficulty hit an all-time high last week. The oldest bank in the country – Bank of New York Mellon – launched a custody service for Bitcoin and Ethereum. Despite these large adoption announcements, crypto prices continue to trade on macro (inflation/Fed) news. (Arcane Research, Oct. 2022)
  • Digital asset ETF news was sparse. Valkyrie announced the closure of their Balance Sheet Opportunities ETF (VBB), which invested in companies that hold Bitcoin on their balance sheets directly or indirectly. (ETF.com, Oct. 2022)
Additional Resources

Ben Bernanke won the Nobel Prize for economics recently, and it’s controversial, but Bloomberg’s chart on “Why People Care About Ben Bernanke shows why some think he won it (Bloomberg, Oct. 2022).

“Scenarios are to stress testing like photos are to social media.”—Raj Udeshi (GoodReads, Oct. 2022)

Be on the lookout for a new Orion podcast called “Weighing The Risks.” 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 will be regarding the mid-term election and the special guest star is Matt Bartolini from State Street Advisors.

Last week’s Orion's The Weighing Machine podcast was with, arguably, the premier college savings / 529 expert in the college savings industry, Paul Curley. If you have future education expenses, or if your clients do, you should listen to this important podcast. On the upcoming podcast this week (Tuesday morning release every week), we talk to Glenn Dorsey from Clark Capital. With Glenn we review the top concerns of investors today. Glenn provides some good thoughts and talking points regarding the current environment.

Financial journalist John Authers has a great daily article on Bloomberg, which usually includes a fun segment at the end—it’s often about music. One last week was about “fake bands” given that last week was the anniversary of the Monkees’ first album. They might have been fake, but in hindsight they were pretty good. So were The Wombles, The Rutles and, of course, Spinal Tap. These are all bands you can trust to take it to 11.

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.

 

*See “Rent Inflation Expected to Accelerate Then Moderate in Mid-2023” Xiaoqing Zhou and Jim Dolmas, Federal Reserve Bank of Dallas, August 2022

1958-OPS-10/18/2022

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.

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