I hope you had a nice weekend. It was definitely a fun Sunday to watch championships in college baseball (Ole Miss winning their first national championship) and in the Stanley Cup (the Colorado Avalanche winning their third and first since 2001).

The stock market is looking to build on Friday’s gains, as US futures are pointing to another higher open led by the tech sector (CNBC, June 2022).

Last week the major indexes posted their first positive week since May (CNBC, June 2022). It was a nice week of gains in what has been otherwise a tough quarter and year.

As for the weekly returns and their impact on the year-to-date returns (using Morningstar indices):

  • The overall US stock market gained nearly 7% last week, now down nearly 19% for the year (Morningstar, June 2022).
  • Growth stocks led gains at nearly 9% for the week, now down about 30% for the year (Morningstar, June 2022).
  • Value stock gained nearly 5% for the week, now down around 6% for the year (Morningstar, June 2022).
  • US Bond Aggregate Index has a slight gain of under 1%, now down about 11% for the year (Morningstar, June 2022).
  • Commodities lost around 4%, now up about 23% for the year (Morningstar, June 2022).
Ten-year Treasury yields finished last week at 3.13% (down 0.11% over the last week). The recent high on June 14, 2022, of 3.48% was its highest level since 2011 (Yahoo! Finance, June 2022).
  • The average 30-year fixed mortgage rate, however, rose again last week to 5.89% as of June 26, 2022 (BankRate, June 2022).
    • Some lenders are quoting mortgage rates of 6% or more as rates reached the highest level in more than 13 years for a second straight week; the largest weekly increase in rates since 1987 (Wall Street Journal, June 2022).
  • The Bloomberg Aggregate Bond Index closed last week at 3.76%, down from its June 14, 2022, high of 4.03% (Bloomberg News, June 2022).
  • One rate not going up, at least not yet, is money market rates. As of June 26, 2022, the average money market rate was 0.08% (BankRate, June 2022).
Despite last week’s gains, AAII Sentiment (American Association of Individual Investors) continues to get worse. Historically, that typically means above-average returns 3-, 6- and 12-months from now (AAII, June 2022).
  • Most bearish sentiment since late April 2022 (59%) (AAII, June 2022).
  • Bearish sentiment has not been as high as April/June 2022 since March 2009, currently at 58% bearish (AAII, June 2022).
  • The spread between bears and bulls has also not been this extreme since March 2009, currently a 39% difference (AAII, June 2022).
  • 8-week moving average on bullish sentiment has not been this low since June 2016, currently at almost 24% (AAII, June 2022).
Deeper Dive 

In recent weeks, we’ve come across multiple conversations from market professionals making compelling arguments about why they are bullish or bearish on the energy sector. That is what makes markets. One investor that likes energy is Warren Buffett as Berkshire Hathaway is buying energy stocks (CNBC, June 2022).

Speaking of Warren Buffett and sector exposures, there’s an interesting graphic from Bloomberg’s John Authers last week: “Six companies — the ones in the chart minus Nvidia Corp. — have at one point had market valuations above $1 trillion. That epic wealth creation has unfortunately turned to destruction. This is the market cap of the six trillionaires at peak, compared to now. Warren Buffett’s Berkshire Hathaway Inc., the largest non-FAANG stock in recent years, is included for comparison:” Source: Authers’ “The Fed Has No Choice But to Let This Tantrum Rip”

Given the prior two bullets, is it a surprise to see what’s joined the Value party when Russell rebalanced their indices last Friday? Facebook, Netflix and PayPal. Energy stocks also now have a larger weighting in the Russell 1000 Growth index (Wall Street Journal, June 2022).

After a really bad quarter for the stock market, what usually happens afterwards in terms of market performance? In short, above-average gains! BeSpoke has examples of what happens after a 15% drop and also what happens after 20% two quarter drops. Source: BeSpoke Investments.

Some juicy data from last week’s economic data, including housing data, which in my book remains a positive for the economy and a buffer against slower growth.

  • May New Home Sales
    • The median price of new homes sold was $449,600 in May, up 15.0% from one year ago (First Trust, June 2022).
    • The average price of new homes sold was $511,400, up 14.8% versus last year (First Trust, June 2022).
    • Sales of new homes broke a four-month losing streak in May, posting a 10.7% gain to easily beat consensus expectations (First Trust, June 2022).
    • Implications: So far, the widely predicted demise of the US housing market has been exaggerated (First Trust, June 2022).
  • Existing home sales
    • Existing home sales declined 3.4% in May to a 5.410 million annual rate, narrowly beating the consensus expected 5.400 million. Sales are down 8.6% versus one year ago (First Trust, June 2022).
    • Buyer urgency remained high in May that 88% of existing homes sold were on the market for less than a month (First Trust, June 2022).
    • Commentary from First Trust: “While sales are clearly under pressure, this is not a repeat of 2008/9. We do not foresee a collapse in home sales even with higher mortgage rates, though it is likely that existing home sales wind up moderately lower in 2022 than 2021. More inventory is becoming available, though more slowly than we would like, which will eventually help price gains moderate further. Also keep in mind that Millennials are now the largest living generation in the US and have begun to enter the housing market in force, which represents a demographic tailwind for sales for the foreseeable future.”
Two weeks in a row for a price drop in the average gas price. It moved down to $4.90 (down 8 cents from the prior week) as of June 26, 2022 (AAA.com, June 2022).

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 still at 0.0% as of June 16, 2022. (The next update is June 27, 2022.)

Looking ahead to second quarter earnings, second quarter 2022 revenue growth is expected to be just over 10% (Strategas, June 2022).

  • Led by the energy sector’s expected growth at 54%. The slowest growing sector is expected to be the financials at -3% (Strategas, June 2022).
  • To the extent to which energy continues to contribute a large portion, aggregate sales growth will continue to look stronger than it actually is (Strategas, June 2022).
We can expect fresh economic data each day on this week's economic schedule, including:
  • Tuesday’s S&P/Case-Shiller House Price Index for April. The consensus is for a 21.0% year-over-year increase in the Comp 20 index for April (Calculated Risk, June 2022).
  • On Wednesday is the third estimate of Gross Domestic Product (GDP), first quarter 2022. The consensus is that real GDP decreased 1.5% annualized in Q1, unchanged from the second estimate of a 1.5% decrease (Calculated Risk, June 2022).
Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager
  • Cryptocurrency prices staged a comeback last week, with Bitcoin rising nearly 7% to over $21,000 and Ethereum rising nearly 12% to more than $1,200. Other major coins had impressive gains, such as Polygon +59%, Avalanche +30%, and Solana +21% (CNBC, June 2022).
  • Crypto broker voyager and exchange CoinFLEX have lowered daily withdrawal limits. Nearly $100 million Ethereum was stolen from the Harmony Bridge (a Bridge connects two or more Blockchains). Crypto lender BlockFi secured a $250 million line of credit with exchange FTX, and FTX is now in negotiations to take a stake in the firm. Despite trouble in the space, many firms have still been able to raise substantial capital from both private funding and in some cases SPAC deals (The Block, June 2022).
  • The first inverse Bitcoin ETF started trading this week. ProShares Short Bitcoin Strategy (BITI) launched on Tuesday and has already traded close to 2 million shares in aggregate (ProShares, June 2022).
Additional Resources  

“Invest in inflation. It’s the only thing going up.” Will Rogers

“I don’t know if the market is going up 10% next or down 10%, but I know what direction the next 100% move is.” Herb Morgan from EMA on the Weighing Machine podcast last week.

This week on Orion's The Weighing Machine podcast we hear from another long-time Orion friend and leading ETF Strategist. This time it’s Scott Ladner from Horizon Investments. In fact, many years ago, Scott was even on the CLS Investment Committee. Horizon Investments is doing a lot of cool things and Scott walks us through their latest thinking.

Looking for a potential dinner party conversation starter? Ask “What would be your walk-up song?” For a frame of reference, we now have nearly 70 songs on the Orion’s The Weighing Machine Playlist.

In case you can’t get enough of Scott Ladner from Horizon Investments this week, he’s also a guest (along with Fidelity Investments) on this week’s Peak Inflation Portfolio Recipe Webinar.

Another great read from Morgan Housel called Keep It Going (Collaborative Fund, June 2022):

  • Housel called it a quick story about athletes and investors, but it’s really all about finding and understanding – and sticking with – an investment strategy(ies). Three choice quips from Housel:
    • That’s the biggest but most obvious secret in investing: Average returns for an above-average period of time leads to magic.
    • What are the best returns I can sustain for the longest period of time?
    • Carl Richards once made the point that a house might be the best investment most people ever make. It’s not that housing provides great returns – it does not. It’s not even the leverage. It’s that people are more likely to buy a house and sit on it without interruption for years or decades than any other asset. It’s the one asset people give compounding a fighting chance to work.
Five points to prevent panic selling (Hidden Levers, June 2022).

Since everybody has now watched Top Gun, did you see this review on Bulwark?

Still trying to plan a summer vacation? Supposedly, according to a recent post on Twitter, the average American has only been to five of these places in the U.S. listed below (John Felico, June 2022). (After this summer, I’ll be down to five left to see).

  • Statue of Liberty
  • Grand Canyon
  • Walt Disney World
  • Zion National Park
  • Space Needle
  • Hollywood Sign
  • Las Vegas Strip
  • Times Square
  • Yellowstone
  • Everglades
  • Pikes Peak
  • Chicago River
  • Washington Monument
  • Mount Rushmore
  • French Quarter
  • Golden Gate Bridge
  • River Walk
  • Niagara Falls
  • Mall of America
  • Gateway Arch
  • Empire State Building
  • Road to Hana
  • Fort Sumter
  • The Alamo
  • Wright Bros Memorial
  • The White House
  • Yosemite National Park
  • Liberty Bell
  • Central Park
  • South Beach
  • Arlington Cemetery
  • Saint Augustine
  • Lake Tahoe
  • Alcatraz
Over the years, I have literally interviewed over a thousand portfolio managers. My very first meeting was with the bond market legend Bill Gross in Newport Beach, CA. Well, today’s “awesome picture” is his Chihuly $1 million, 10-foot-tall cobalt glass lass art installation in his backyard that was back in the news recently. The art installation next to the Pacific Ocean is quite the sight, but it’s also caused quite a stir, and the LA Times story even involved one of my favorite childhood TV shows, which I clearly spent too much time watching.

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. 

1132-OPS-6/28/2022

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.

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