Despite some sensational earnings disappointments last week from companies such as Facebook and Amazon, the stock market still ended with another solid gain marked its first consecutive weekly gain in two months (Barron’s, Oct. 2022). Lots of good stats on the markets from Barron’s:

  • The Dow Jones Industrials index has jumped over 14% in October so far and is on pace for its best month since January 1976 (when it gained 14.41%) (Barron’s, Oct. 2022).
  • The Dow has crushed the Nasdaq, outperforming it by more than 9% this month, the most since February 2002 (when it outperformed by 12.35%) and the seventh-largest monthly gap in 45 years (Barron’s, Oct. 2022).
This week’s potential market-moving event will be the Fed meeting on Wednesday. It is expected that they will raise short-term interest rates another 75 basis points (Calculated Risk, Oct. 2022). The key, however, is the post-meeting press conference. Many are hoping to hear some clues that the Fed might slow or pause hikes soon; some Fed presidents have already hinted as such (Bloomberg, Oct. 2022).
  • We will also get the October jobs report on Friday from the Bureau of Labor Statistics (Calculated Risk, Oct. 2022).
The interest rate markets continue to be volatile:
  • Last week Ten-year Treasury yields finished at 4.01% (down 20 basis points over the last week); the highest yield last week was 4.33% (Yahoo! Finance, Oct. 2022).
    • This is the first weekly decrease in the 10-year yield in about 12 weeks (Yahoo! Finance, Oct. 2022).
  • The yield to maturity on the Bloomberg Aggregate Bond Index also dropped last week to 4.95%, as of October 28, 2022 (down 16 basis points) (Bloomberg, Oct. 2022).
  • The average money market yield is 2.85% as of October 28, 2022 (Crane Data, Oct. 2022).
  • The average 30-year fixed mortgage rate is at 7.20% (Bankrate, Oct. 2022).
Getting back to some of the notable price action in the stock market last week, including Facebook (now Meta) losing a quarter of its value in one day… as of last Thursday night, Meta has now underperformed the stock market since its 2012 IPO (Bloomberg, Oct. 2022). Wow.

Deeper Dive

Investing in growth stocks has hurt, according to JPMorgan Chase (JPM), and personal portfolios in the U.S. fell a horrifying 44% between early January and October 18, per an October 22, 2022 article in Financial Times.

On that last point, in John Authers’ October 25, 2022 Bloomberg article: “stock market weakness is precisely what Doug Ramsey of The Leuthold Group said could be the key to cooling inflation. The Fed’s hope, he said, lies in a behavioral economic theory called reverse wealth effect, in which consumers spend less as their wealth decreases. That should lead consumers to buy less stuff, particularly on big-ticket items like homes. And that should either prevent or at least slow the much-feared inflationary spiral.” The wealth loss as % of GDP on this bear market has been significant – one of the worst in the last 50 or so years (Bloomberg, Oct. 2022).

The aforementioned article from Bloomberg also had a useful chart on inflation and looking at the historical experience since 1920 of average inflation spikes – and how fast inflation drops after it peaks (Oct. 2022). In short, in addition to some of the economic data we’ve seen, we can now add the “historical experience” to suggest that peak inflation is near (or we’ve already seen it) (Bloomberg, Oct. 2022). That’s the good news. The bad news, however, is that inflation typically doesn’t drop as fast as current expectations show for this cycle (Bloomberg, Oct. 2022).

Inflation is above average, and it may be peaking (Bloomberg, Oct. 2022). If inflation does start to fall, and even if it remains above-average, look at what asset class has historically done the best (at least since 1985 according to asset allocation expert William Bernstein): bonds! (Bernstein, June 2021)

How long is the sales process when it comes to penetrating the independent broker-dealer (IBD) channel? More than 60% of the time it takes over a year, according to a graphic from L.C. Kirk & Co. (Oct. 2022).

A WealthManagement.com research report, done in conjunction with FlexShares, the ETF division of Northern Trust, in September 2022, found that 32% of RIAs outsourced investment management in 2022, up from 27% in 2020 (Yahoo! Finance, Sept. 2022). On average, RIAs outsource about 50% of their assets under management, compared to 39% for independent broker/dealers (Yahoo! Finance, Sept. 2022). “This increased adoption may be a function of business size. As RIAs tend to be smaller enterprises, many need greater external support amid recent market disruptions,” the report said (Wealth Management, Sept. 2022).

Key economic data last week from First Trust’s Market Watch included September New Home Sales:

  • Sales are down 17.6% from a year ago (First Trust, Oct. 2022).
  • The median price of new homes sold was $470,600 in September, up 13.9% from a year ago; the average price of new homes sold was $517,700, up 10.0% versus last year (First Trust, Oct. 2022).
  • 30-year mortgage rates remain a significant headwind and currently sit above 7%, the highest since 2000 (First Trust, Oct. 2022). Assuming a 20% down payment, the change in mortgage rates and home prices just since December amount to a 76% increase in monthly payments on a new 30-year mortgage for the median new home (First Trust, Oct. 2022).
  • Don’t expect gains in the next twelve months; we project home prices three to four years from now to be about where they are today (First Trust, Oct. 2022). That said, you also shouldn’t expect a very steep 25% peak-to-bottom decline in home prices like in the prior housing bust: more like a 5-10% drop, instead (First Trust, Oct. 2022). Why? Because housing is not massively overbuilt like it was at the peak of the housing bubble around 2005-06 (First Trust, Oct. 2022).
The housing market isn't going to crash. Read the "Inflation Guy" Michael Ashton’s LinkedIn post on housing on October 26, 2022: “If housing prices are going to crash, we will need to see M2 (money supply) crash – not its growth, but its level. M2 recently has been flat, which means home price growth should flatten out. There is absolutely no reason to expect nominal prices to decline, although real prices probably will as the price level itself catches up to the rise in M2.”

As for the economic calendar posted by Calculated Risk this week:

  • Wednesday, November 2: Federal Open Market Committee (FOMC) Meeting Announcement – The Federal Reserve is expected to raise interest rates again by 75 basis points (Calculated Risk, Oct. 2022). If expectations are correct, this will be the sixth hike to the Federal Funds Rate this year in the Fed’s effort to combat record high inflation.
  • Friday, November 4: Jobs report – Consensus estimates are for a 1 basis point increase to unemployment, up to 3.6% (Calculated Risk, Oct. 2022).
The Atlanta Fed’s GDPNow‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) ended slightly above the final release, which was 2.6% for the third quarter of 2022. This marked the first positive quarter of GDP growth this year (GDPNow, Oct. 2022).

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 4.1% (Refinitiv, Oct. 2022). If the energy sector is excluded, the growth rate for the index is -3.5% (Refinitiv, Oct. 2022).
  • Of the 263 companies in the S&P 500 that have reported earnings to-date for 22Q3, 73.4% reported above analyst expectations (Refinitiv, Oct. 2022). This compares to a long-term average of 66% (Refinitiv, Oct. 2022).
  • The 22Q3 Y/Y blended revenue growth estimate is 10.3% (Refinitiv, Oct. 2022). If the energy sector is excluded, the growth rate for the index is 7.2% (Refinitiv, Oct. 2022).
Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager
  • Cryptocurrency prices are showing renewed signs of life: Bitcoin jumped 6% on the week to trade near $21,000; Ethereum rocketed higher by 20% to trade near $1,600 (Decrypt, Oct. 2022). Other major coins were higher by double digits: Dogecoin doubled on the week as the coin’s richest fan, Elon Musk, completed his acquisition of Twitter (Decrypt, Oct. 2022).
  • Meta (Facebook) reported a loss of $9.4 Billion for its metaverse division in 2022 (Arcane Research, Oct. 2022). Venture capital firm A16z announced a 40% drop in its flagship crypto fund this year (Arcane Research, Oct. 2022). Crypto exchange Binance was reported to be an equity investor in Twitter, helping fund Musk’s aforementioned acquisition (Arcane Research, Oct. 2022). Earlier in the week, Rishi Sunak became prime minister of the UK - Sunak is the former finance minister and a crypto advocate (Arcane Research, Oct. 2022). Bitcoin volatility is now lower than the stock market, at least for the moment (Blanco Research, Oct. 2022).
  • No new digital asset ETF news to report this week.
Additional Resources

“The fact that people are fallible is your biggest enduring advantage in the accumulation of greater wealth. The fact that you are just as fallible is the biggest impediment to that very same goal.”― Dr. Daniel Crosby, The Laws of Wealth: Psychology and the Secret to Investing Success (GoodReads, Oct. 2022).

Last week’s Orion's The Weighing Machine podcast was with Brett Van Bortel from Invesco Consulting on how to retain top clients! Brett is one of the better speakers on the financial advisor conference circuit with his various presentations. This week’s podcast (published early each week on Tuesday morning) is with Wellington Investments Ken Baumgartner on the infrastructure asset class. Not only is this asset class a potential hedge versus inflation, but it’s an area that has interesting return and diversification benefit potential in the years and decades ahead. Baumgartner was a long-time NHL hockey player but, regretfully, we didn’t get into the good hockey conversations until after we turned off the “record” button.

The first monthly "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.

Speaking of risks, ever get questions about why Orion Portfolio Solutions’ (OPS) investment risk scores are higher than OPS investor scores (0-100)? There’s a good and intuitive reason for that – some investments are a lot riskier than the over-all stock market (OPS, Oct. 2022)! Here are some bullet points on the topic – and a video!

  • The most aggressive option for the investor risk score (100) is investing entirely in the global equity market (OPS, Oct. 2022).
  • The global equity market has a risk score of 100 (OPS, Oct. 2022).
  • Some investments, however, are riskier than the global equity market and thus have higher risk scores (OPS, Oct. 2022).   
  • If investors are selecting higher risk investments, they should diversify into lower risk investments to bring over-all portfolio risk back to appropriate levels (OPS, Oct. 2022).
  • Thus, the relationship between the investor and investment risk scores is intuitive, consistent with investment theory and fiduciary practice, and completely aligned (OPS, Oct. 2022). 
  • Short OPS Risk Video
Notice how a lot of articles talk about how bad inflation was in the 1970s? It was. But prices were still a lot lower. See Peter Mallouk’s tweet from October 23, 2022, on his two observations.

According to the “Three Lessons From Andrew Beer” blog post by Jack Forehand on Validea on October 29, 2022: Some of the best performing strategies in the markets this year are managed futures. Be on the lookout for our own interview of Andrew Beer in a few weeks on The Weighing Machine.

Burnt out on negative news and emails? Well, there’s this new site showing up in the financial media a lot: Prime Cuts by Philip Pearlman. Check out: The Opposite of Schadenfreude (Prime Cuts, Oct. 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.

   

2085-OPS-11/1/2022

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/.