Hope you had a great weekend. For those who follow the NFL, and who participate in fantasy football, don’t you find it liberating to root for teams instead of combinations of players who might be on both teams in a game? Nonetheless, I still got a kick out of “my players” scoring this weekend. Congrats to fans of the Eagles, Bengals, 49ers, and Chiefs. Should be some great championship games coming up.

Performance last week:

  • The overall US equity market had its first weekly loss in 2023 (Morningstar, Jan. 2023).
  • However, growth stocks caught a late week rally to push them positive for the week (Morningstar, Jan. 2023).
  • Additional winners for the week were international stocks and commodities (Morningstar, Jan. 2023).
  • Year-to-date, balanced portfolios are off to a nice start with the S&P 500 up nearly 4%, international stocks up over 7%, and bonds up nearly 3% (Morningstar, Jan. 2023).
Some more performance highlights provided by BeSpoke Investment Group:
  • 2023 is only three weeks old but, already, five of the 14 country ETFs are up over 10% YTD, and all but two (Brazil and India) are up over 5% (BeSpoke, Jan. 2023).
More from BeSpoke Investment Group: “It probably hasn’t gotten enough coverage, but relative to its historical volatility, the US Dollar Index has been extremely weak over the last four months. After trading at a 20+ year peak in late September, the Dollar Index has declined over 10%.” (BeSpoke, Jan. 2023)

Here is where key interest rates ended up last week:

  • Short term rates moved slightly higher (Yahoo Finance, Jan. 2023)
  • Good to see mortgage rates fall faster than other rates (Yahoo Finance, Jan. 2023)
Deeper Dive

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 now considers it about a 99.8% chance we will see a 25 basis point increase to Fed Funds (to 4.50-4.75). While it seems like some could still make an argument for a 50 basis point increase, could you imagine the market surprise if we actually got one?

Regarding the losses from last year, there was an upside to last year’s downside – higher yields! A table on asset class yields is on Charlie Bilello’s December 31, 2022 Twitter post.

  • For fixed income asset classes, the best way to determine an expected return is to simply use the current yield, then make an adjustment for credit risk (Charlie Bilello, Dec. 2022).
  • So, a 10-year Treasury bond’s expected return over the next 10 years is 3.88% (Charlie Bilello, Dec. 2022).
  • High yield bonds meanwhile, start off with a 8.87% starting yield, but given some bonds will default, the expected return is then reduced (Charlie Bilello, Dec. 2022).
  • To build a stock market expected return, there are three components: starting yield, growth of that yield, and changes in valuations (actually, these building blocks apply to all investments). The current dividend yield from stocks of 1.7% is below the long-term average of 3%+ (Charlie Bilello, Dec. 2022).
Ben Carlson at AWealthofCommonSense.com on one of five key numbers to watch: mortgage rates.
  • “Mortgage rates. Housing makes up roughly 20% of the U.S. economy so activity in this market will have a big impact on how things shake out this year." (A Wealth of Common Sense, Jan. 2023)
  • "The median existing-home price in the United States is a little more than $376k. Assuming 20% down, the mortgage payment with a 30-year fixed at 7% is around $2,000/month." (A Wealth of Common Sense, Jan. 2023)
  • "Moving down to 6% takes you down to $1,800/month or a drop of 10%. Each 1% decrease in rates knocks another 10% or so off the monthly payment (this obviously works in the opposite direction as well)." (A Wealth of Common Sense, Jan. 2023)
  • "If mortgage rates go back to 5% or so and remain there, housing market activity will likely pick back up in a big way from all those millennials waiting in the wings to form households.” (A Wealth of Common Sense, Jan. 2023)
AAII Sentiment last week was still bearish, but it was the least bearish in more than nine months (American Association of Individual Investors, Jan. 2023)! In fact, there were only two weeks in 2022 where the weekly difference of bulls and bears was less negative (March 31 and January 6) than last week’s (AAII, Jan. 2023).

According to Schwab’s Liz Ann Sonders in her January 17, 2023 Tweet: “No two bear markets are identical, but interesting to compare current one (orange) to that associated with tech bust in early 2000s (blue) … both indexed to 100 at respective peaks [Past performance is no guarantee of future results]”. (Liz Ann Sonders, Jan. 2023)

The overall stock market after the dot.com bust struggled, but those struggles were primarily driven by losses in growth stocks, and value stocks performed much better; which has been the historical tendency (Lutz Financial, Jan. 2023). On that point, how have value stocks performed since 1926? In this article called "The Return of the Value Premium", value outperformed by 3%/year since 1926 (12.8% vs 9.8%) (Lutz Financial, Jan. 2023). It’s been lumpy outperformance, but as one money manager I used to follow closely liked to say, “value will out”, meaning value will eventually win in the end. [Past performance is no guarantee of future results.]

Another chart from the Ken French Data Library and CRSP (Center for Research in Security Prices) database shows the 10-year annualized performance between the highest valuation stocks (as defined by price/earnings ratios) and the lowest.

  • Since 1961, low price/earnings (P/E) stocks overwhelmingly dominated 10-year trailing returns, except for the last 5+ years (Ken French, Nov. 2022).
  • Recent years showed even more extreme outperformance by high P/E stocksending in 2020.  The outperformance was even more than the com bubble (Ken French, Nov. 2022).
  • Low P/E is now outperforming over 10 years and, if history is any indication, expect that 10-year number to continue favoring low P/E stocks (Ken French, Nov. 2022).
The first exchange traded fund (ETF) is 30 years old this week!
  • “Thirty years ago this week, State Street Global Advisors launched the Standard & Poor’s Depositary Receipt (SPY), the first U.S.-based Exchange Traded Fund (ETF), which tracked the S&P 500.” (CNBC, Jan. 2023)
  • “Today, it’s known as the SPDR S&P 500 ETF Trust, or just “SPDR” (pronounced “Spider”). It is the largest ETF in the world with over $370 billion in assets under management, and is also the most actively traded, routinely trading over 80 million shares daily with a dollar volume north of $32 billion every day.” (CNBC, Jan. 2023)
Fourth-quarter earnings season has begun. Here’s an update from the FactSet Earnings Insight report:
  • Earnings Scorecard: For Q4 2022 (with 11% of S&P 500 companies reporting actual results), 67% of S&P 500 companies have reported a positive EPS surprise and 64% of S&P 500 companies have reported a positive revenue surprise (FactSet, Jan. 2023).
  • Earnings Growth: For Q4 2022, the blended earnings decline for the S&P 500 is -4.6% (FactSet, Jan. 2023). If -4.6% is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decline in earnings since Q3 2020 (-5.7%) (FactSet, Jan. 2023).
As for key economic data last week:
  • The major surprise was the Producer Price Index (PPI) coming in well below consensus expectations, also representing the largest decrease in the index since April 2020, according to First Trust (Jan. 2023). This represents more positive news on the inflation front – prices are beginning to moderate.
  • Core PPI, Retail Sales, and Existing Home Sales came in near consensus expectations (First Trust, Jan. 2023).
On the economic calendar this week posted by Calculated Risk:
  • Fourth-quarter GDP is expected to be 2.8% according to economists.
Atlanta Fed's GDPNow, however, still is projecting 3.5% (down 0.6% from last week) for expected growth in the fourth quarter of 2022 (Jan. 2023).

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

  • Crypto prices continued their climb last week, with most of the weekly gains coming late Friday into Saturday (CoinMarketCap, Jan. 2023). Bitcoin jumped 8% to $22,500 and Ethereum climbed 5% to $1,600 (CoinMarketCap, Jan. 2023). Most other major coins lagged the top two, but still posted mid-single digit gains (CoinMarketCap, Jan. 2023).
  • Lending related fallout continues, as Genesis files for Chapter 11 bankruptcy protection (Arcane Research, Jan. 2023). Digital Currency Group owns Genesis, as well as Grayscale and Coindesk (which is reportedly for sale) (Arcane Research, Jan. 2023). More than a third of all Congress members received donations from FTX (Arcane Research, Jan. 2023). The National Australia Bank created a stablecoin (Arcane Research, Jan. 2023). A solo miner was able to solve a Bitcoin block over the weekend, something typically only achieved by large pools of computing power (Decrypt, Jan. 2023). For those in Nebraska, a cryptocurrency mining facility was approved for construction just west of Grand Island (Hastings Tribune, Jan. 2023).
  • No major digital asset ETF news last week.
Additional Resources

“The world is a book and those who do not travel read only one page.” ― St. Augustine (GoodReads, Jan. 2023)

On this week’s Orion's The Weighing Machine podcast we talk to Dave Lundgren, the chief market strategist for MOTR Capital Management. Dave is one of the leading technical analysts in the industry today, has one of the top podcasts on technical analysis, and has been successfully managing investment portfolios for decades. He’s also a good friend. We talk philosophy and the markets.

Speaking of podcasts, the “Behavioral Economics” playlist on Spotify is pretty cool. Hundreds of interviews on behavioral economics, including some with our own Dr. Daniel Crosby.

Wow. These short videos are fantastic. Chris Davis and Morgan Housel on “Mastering the Mental Game of Investing” at DavisFunds.com.

“Fidelity released a survey highlighting some CRAZY real statistics examining younger generations & their relationship with money”, per Steve Wagner’s Tweet on January 21, 2023. Twelve takeaways from the study including, “1 in 4 adults would rather run a 5K on Thanksgiving morning than cut back on spending”. (Steve Wagner, Jan. 2023)

On that last point, here’s another recent thought-provoking article from Morgan Housel at CollabFund.com on “The Art and Science of Spending Money”.

"The Power of Writing" – it helps crystallize and articulate thinking. Check out “Earning Wisdom” from January 17, 2023 on RationalWalk.com.

Speaking of power, here’s a Wall Street Journal article from January 13, 2023: “The Lifelong Power of Close Relationships”.

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.

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0219-OPS-1/26/2023

 

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/.