This week is the inaugural National Investment Risk Management Day – on January 19. It’s a real holiday now as Toews Asset Management, through the National Archives, has established the new holiday to be celebrated annually on January 19. Given our emphasis on risk at Orion, scoring investor risk through either our new Risk Tolerance Questionnaire (a project led by our own Dr. Daniel Crosby) or our Orion's Risk Methodology, this is a holiday we can get  behind.

The stock markets last week had their best week in months (Morningstar, Jan. 2023). Many price charts are starting to look healthier again (Morningstar, Jan. 2023). As for market returns last week, a new table from Morningstar on “Stocks, Bonds, and Alternatives as of January 13, 2023” show a good perspective on how balanced portfolios behaved last week.

  • In short, the markets had a great week last week and are off to a solid start for the year (Morningstar, Jan. 2023).
  • The class 60/40 balanced portfolio is off to its best start to the year since at least 1988, which is nice given last year was the second worst year ever for balanced portfolios and the worst since the Great Financial Crisis (GFC) in 2008 (Morningstar, Jan. 2023).
  • Leading the way are US small caps and international stocks, both up over 7% YTD (Morningstar, Jan. 2023).
  • Among diversifiers, bonds are up nearly 3%(!), alternatives are up 1.5% and real assets/commodities are down nearly 1%for the year (Morningstar, Jan. 2023).
  • The US Dollar is also down 1% (Morningstar, Jan. 2023).
Some more performance highlights noted by BeSpoke Investments in January 2023:
  • “U.S. large cap stocks booked their best week (last week) since November 11th and small cap stocks had their best since October 28th.” (BeSpoke Investments, Jan. 2023)
  • “It’s been a downright epic start to the year for European indices as markets have breathed a sigh of relief at the peaking of the dollar, the moderate winter and therefore lower gas prices, and the big rally in sovereign and corporate credit alike. The STOXX 600 is trading at the highest levels since April, having surged a full 18.2% off the September lows. While not yet in a new bull market, the higher highs are fueling the best start to a year for the continent’s equity market since at least 1986.” (BeSpoke Investments, Jan. 2023)
  • “After the worst year on record for the 60-40 (balanced) portfolio things are starting to turn up. Last year a 60-40 stocks-bonds portfolio comprised of the S&P 500 and the Bloomberg Aggregate Bond Index lost a staggering 16%. That’s not as bad as the record conflagration in 2008 (when 60-40 crashed 20.1%), but other than the Global Financial Crisis was worse than any other year. This year it’s a very different result so far, with a 60-40 portfolio starting out on its best pace since at least 1988 when daily index data for the two components begins.” (BeSpoke Investments, Jan. 2023)
Here is where key interest rates ended up last week, as of January 13, 2023:
  • Lower interest rates last week, with the overall Bond Index (thanks to improving credit) leading the way (Yahoo Finance, S&P Global, Crane Data, Bankrate, Jan. 2023).
Deeper Dive

One common notion is that the Federal Reserve will raise short-term rates until they are above inflation. For a frame of reference, looking at common data going back to 1954:

  • The average Federal Funds Effective Rate has been 4.60%. The median has been 4.13% (FRED, Jan. 2023).
  • The Consumer Price Index (CPI) has averaged 3.56% with a median of 2.87% (US Bureau of Labor Statistics, Jan. 2023).
  • In other words, the FedFunds has typically been 1%+ higher than CPI (FRED, Jan. 2023).
  • Currently, the Fed Funds rate is at 4.25-4.50% (FRED, Jan. 2023) and CPI is at 6.5% (US Bureau of Labor Statistics, Jan. 2023). In short, it is reasonable to expect that the Fed will need to keep raising rates until CPI is lower.
When might short-term rates move ahead of inflation? If we’re lucky, soon. BeSpoke comments on inflation:
  • “If headline CPI is flat or falls over the next two reports and the Fed raises rates by a quarter point on February 1st, Fed Funds will be higher than CPI’s YoY change.” (BeSpoke Investments, Jan. 2023)
  • “Even assuming a gaudy 0.5% or 0.6% MoM CPI pace (implausible with durable goods ex autos falling 10% annualized and other prices broadly disinflating), Fed Funds will exceed CPI YoY in the middle of the year.” (BeSpoke Investments, Jan. 2023)
  • Note that the Fed is still talking tough, though. “Richmond Fed President Barkin’s claim that he expects inflation to be ‘more persistent’ rings hollow, but St. Louis Fed President Bullard’s view is that there is ‘too much optimism in markets that inflation will fall’." (BeSpoke Investments, Jan. 2023)
US inflation-adjusted hourly earnings are still negative, according to Charlie Bilello’s January 12, 2023 chart powered by Y Charts on Twitter (“US Real Average Hourly Earnings”). That would also suggest that the Fed’s work is not done until this goes positive too.

Related to Charlie’s chart, just for fun using the most common cash proxy (the 3-month Treasury bill), the average 3-month Treasury Bill has been 4.17% (Charlie Bilello, Jan. 2023). The median has been 3.96% (Charlie Bilello, Jan. 2023). That’s basically where money market yields are now. To be honest, I would have guessed the 3-month T-Bills would have had higher yields than the Fed Funds rate. Learn something all the time…

The next Federal Open Market Committee (FOMC) meeting isn’t until February 1 but, as of now, according to the CME FedWatch Tool, the market considers it about a 90% chance we will see a 25 basis point increase to Fed Funds (to 4.50-4.75) and only a 10% chance we see a 50 basis point increase (CME Group, Jan. 2023).

Could the market be in for a surprise though? The market is expected to have a much better inflation backdrop than what the Fed is communicating, per a Twitter post on January 11, 2023 by @biancoresearch.

As a Chartered Market Technician (CMT), I often get asked “which (market) charts look best?” While I believe that technicals are only one input to making investment decisions, when it comes to the equity markets, emerging markets and small caps look pretty strong right now (Bloomberg, Jan. 2023). Two commodity charts also stand out. First, gold looks great; copper does too (Bloomberg, Jan. 2023). Given these last two, and my belief that prices often move before the fundamental narrative, does this mean global growth (and perhaps even inflation) might be higher than people expect in 2023?

ETF flows remain a wave to ride. According to the State Street Global Advisors Flash Flow post on January 6, 2023:

  • “Although the 60/40 portfolio just posted its second-worst year ever, ETFs had their second-best year of inflows in 2022. And seven areas we track set annual records.”
In my opinion, regarding ETF Flows: “Enjoy every ride while it lasts; there’s always another wave coming soon.” (@SahilBloom @WisdomMadeEasy, Jan. 2023).

Speaking of waves, FundFire notes that:

  • “Direct indexing is expected to be a key growth driver in the wealth management space over the next several years, as advisors clamor for more differentiated offerings, and providers cater to a largely untapped market with a slew of new strategies.” (FundFire, “FOMO, Taxes, ESG Fuel Interest in Direct Indexing”, October 31, 2022).
  • “Direct-indexing assets are expected to hit $825 billion by 2026, growing at an annualized rate of 12.3%, according to Cerulli Associates, that represents an increase from the research firm’s previous projection of 12% annualized growth a year earlier, as reported.” (FundFire, “Direct-Indexing Assets to Reach $825B by 2026: Report”, December 6, 2022).
Gotta love Meb Faber. Clear opinions stated in fun ways. Here was a fun exercise from him that I found from January 10, 2023: What Investment Belief Do You Hold That the Vast Majority of Your Peers (75%+) Do Not Share? Meb has been doing this for a few years now. Quick and thought-provoking, including the notion that U.S. based financial advisors and asset managers should only be invested in international stocks.

Speaking of Meb, he also posted a nice short read on LinkedIn on January 12, 2023, about how investing in international stocks work.

Fourth-quarter earnings season has begun. A few items stand out from the weekly FactSet earnings report released January 13, 2023:

  • The fourth quarter marked the highest percentage of S&P 500 companies citing “inflation” on quarterly earnings calls going back to at least 2010 at 74% (FactSet, Jan. 2023).
  • As for current year 2022, the estimated earnings growth rate for the S&P 500 is 4.8% (FactSet, Jan. 2023). If 4.8% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate for the index since Q4 2020 (3.8%) (FactSet, Jan. 2023).
Something to watch: profit margins falling (especially if wage pressures continue). Check out the “S&P 500 Margin (4Qtr Ave.) vs. 10 Year Average” chart from Strategas (Jan. 2023).

As for key data last week, the highlight was the CPI:

  • Though CPI is now off the peak of 9.1%, as First Trust notes in their economic analysis:“The consumer price index was up 7.0% in the 12-month period ending December 2021 and up 6.5% in the most recent twelve months. No matter which way you cut it, inflation remains well above the Federal Reserve’s target of 2.0%.” (First Trust, Jan. 2023)
On the economic calendar this week posted on Calculated Risk, we get the producer price index for December on Wednesday.

Atlanta Fed's GDPNow improved again last week to 4.1% (up 0.3%) for expected growth in the fourth quarter of 2022. Again, the economy continues to show more positive momentum than most seem to think (GDPNow, Jan. 2023). Check out the “Evolution of Atlanta Fed GDPNow real GDP estimate for 2022: Q4” chart which shows the forecasts of professional economists.

Inflation is falling but remains above average (William Bernstein, Jan. 2023). How to invest? Diversify! Stocks, bonds and real assets all produce positive risk-adjusted performance, but remarkably bonds post the best risk-adjusted returns in this particular inflationary environment, and they are indeed off to a good start this year (William Bernstein, Jan. 2023).

Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager

  • The bounce continues! Crypto prices were higher again last week, with Bitcoin rocketing higher more than 22%, breaking through the $20k level and then some (CoinMarketCap, Jan. 2023). Prices hovered around $21,300 Monday (CoinMarketCap, Jan. 2023). Ethereum climbed 19%, nearing $1,600 (CoinMarketCap, Jan. 2023). Solana continues to refute its own demise, adding another 42% last week and 136% so far in 2023 (CoinMarketCap, Jan. 2023).
  • The SEC charged Gemini and Genesis (which are in a public spat over various accusations) with unregistered securities offerings related to their earn programs (Arcane Research, Jan. 2023). Coinbase and Crypto.com announced more layoffs while Binance detailed a plan to grow their employee base by 30% (DeCrypt, Jan. 2023). FTX reportedly recovered $5 billion in assets, a hopeful sign for customers (DeCrypt, Jan. 2023). Amazon Web Services (which many don’t know actually powers/hosts a huge % of the digital asset industry) teamed up with Avalanche to scale their blockchain, contributing to the Avalanche token rising more than 50% last week (Arcane Research, Jan. 2023).
  • The Volt Crypto Industry and Equity ETF (BTCR) announced it will stop trading after the close of January 17 (ETF.com, Jan. 2023). The ETF has $1.8 million in assets and has fallen ~-78% since inception (ETF.com, Jan. 2023).
Additional Resources

“You can never have too much love – or too much gravy.” ~ Warren Buffett (famous consumer of cheeseburgers and Coca-Colas) (GoodReads, Jan. 2023).

On this week’s Orion's The Weighing Machine (TWM) podcast we talk to Venk Reddy from Osterweis. We’ve discussed ESG investing several times on TWM, but this time was the first time looking at ESG investing from a fixed income perspective. You know what? This was a great interview. Perhaps not because of the questions, but because the answers were so good. This is one podcast I’m even taking notes on to use later.

In a recent TWM podcast interview, we asked a female portfolio manager what it would take to get more women into the industry as investment managers and counselors. One answer on her list was that, hopefully, pop culture will have a strong female lead in a Wall Street movie sometime. Good point. Here’s one list from Well Kept Wallet in August 2022 of the "Top Wall Street Movies" and I think she has a point. The 1988 move "Working Girl" with Melanie Griffith didn’t make the list, but is it the best “Wall Street movie” featuring a female lead?

Orion took the prize this year for both “Best Technology” and, via the Communities program, the “Best Model Market Marketplace” in 2023’s America’s Best TAMPs based on the results presented of an independent survey of all Wealth Advisor subscribers.

Don’t miss Orion's Ascent conference. The goal of Ascent 2023 is to give advisors the tools they need to lean into change and embrace innovation, disrupt the status quo and ultimately win for themselves and their clients.

Animated Chart:  The Rise and Fall of Music Sales, by Format (1973-2021) on VisualCapitalist.com from January 13, 2023. As a huge consumer of music over the years (I still have boxes of cassettes for goodness sakes), I found the graphic fascinating.

Since we’re talking music, what is the most awesome picture on an album cover of all time? There are lots of lists on Billboard.com, and many good opinions, and great fodder for dinner party discussions, but the one I think of first is The Clash’s London Calling album (which in turn was a cover of a famous Elvis album cover).

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.

0139-OPS-1/18/2023

Orion Portfolio Solutions (“OPS”) was selected as a winner for America’s Best TAMPs 2023 in the categories of Best Technology and Best Model Marketplace. Each TAMP (“Provider”) included in America’s Best TAMPs 2023 is based on the results presented of an independent survey of all Wealth Advisor subscribers. The methodology used for this independent survey of The Wealth Advisor’s registered subscribers was deployed on December 26th and closed on December 29, 2022. The survey uncovered advisor familiarity and overall satisfaction covering three categories set forth for the 27 of the TAMP solution providers nominated. The winners and full survey results were published in the 2023 edition of America’s Best TAMPs and released on January 3, 2023. Each TAMP provider paid the same sponsorship fee to be listed in America’s Best TAMP’s. Sponsorship fee has no tie-in or connection to survey results. The fee entitles providers to also receive marketing services from The Wealth Advisor. Providers have no affiliation with The Wealth Advisor.

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/.