Less than four weeks remain in the year!

Regarding these bullets, Ben Vaske and I try to make these so they can be read quickly, though, of course, take as much time with them as you want! The ultimate goal each week is for you to get at least one good thing you can use in conversations or for making decisions (or both). Enjoy – and let us know if you have any questions.

Futures are pointing to losses to start the week (CNBC, Dec. 2022). Oil prices shot up Monday morning in response to price ceilings for Russian oil, and Chinese stocks were higher due to a broad loosening of pandemic protocols by China’s president Xi Jinping (CNBC, Dec. 2022).

Last week saw the end of November, and it was quite a month for the markets:

  • Over 5% total return for the US market (Morningstar, Dec. 2022).
  • Nearly 8% total return for the global market, driven by exceptionally strong returns in both developed and emerging market international equities (Morningstar, Dec. 2022).
  • Gains in the US were led by value (+6%), which has outperformed growth in the one-month, quarter-to-date, year-to-date, 1-Yr, and 3-Yr time frames (Morningstar, Dec. 2022).
  • Bonds and commodities were also positive for the month (Morningstar, Dec. 2022). Bonds are still down nearly 13% year-to-date, while commodities are up about 19% (Morningstar, Dec. 2022). Also, it’s notable that the Aggregate Bond index is still down by over 2% per year in the 3-Yr timeframe (Morningstar, Dec. 2022).
As of last Wednesday, the Dow entered a bull market, rallying 20% off its closing low from September 30th (Morningstar, Dec. 2022). The S&P 500 has yet to confirm its own bull market, rallying 14% off its lows through Thursday (Morningstar, Dec. 2022).

Another note on international – it’s notably outperformed over the last month and quarter-to-date (Morningstar, Dec. 2022). It’s now a horse race in terms of 2022 performance vs the US market. If international outperforms the US in 2022, how might that shape portfolios in 2023 – especially if the dollar continues to drop?

On the topic of international, according to Bespoke Investments, stocks in Hong Kong have rallied to its largest monthly gain since October 1998 and just its ninth monthly gain of 25% or more since 1970 (Bespoke, Dec. 2022).

As for year-to-date returns, according to Strategas: “…(the current) year-to-date decline for the S&P ranks as the 5th worst 12/31 to 11/30 showing since 1950 – trailing only 2008 (-39%), 1974 (-28%), 1973 (-19%), and 2002 (-18). December has a well-earned reputation for seasonal strength, but historically the final month’s performance is skewed by what the preceding 11 months looked like” (Strategas, Dec. 2022). 

Seasonality has been one powerful reason (in my opinion) for the strong quarter so far. How does the month of December specifically typically play out? According to Bespoke Investments, it’s usually pretty good:

  • December has historically been one of the most consistently positive months of the year for US equities (Bespoke, Dec. 2022).
  • December performance in big down years like 2022, however, has been weaker than normal (Bespoke, Dec. 2022).
  • On an intraday basis, returns during December have been back-end loaded as the bulk of the month's gains typically come in the second half of December (Bespoke, Dec. 2022).
Small caps have outperformed this year (Strategas, Dec. 2022). According to Strategas, they expect that the “average stock” will likely continue to outperform the “top of the market” – an implied message that active management should do better in the year(s) ahead (Strategas, Dec. 2022). In a November 2022 report, Strategas has a chart of Amazon versus the average stock. If the line is going up, Amazon is outperforming, and vice versa (Strategas, Nov. 2022). From a technical standpoint, this doesn’t look good for Amazon – at least in terms of relative performance.

In more from Strategas on the same topic, a December 2022 report shows the average stock in the S&P vs the largest 50 names in the S&P. Again, it suggests that the average stock could outperform given its breakout to new highs recently.

In the Orion Portfolio Solutions (OPS) November 2022 “Monthly Flows” webinar, we noted that boutique/emerging managers/strategies have been outperforming this year on a total return and risk-adjusted basis. Again, if the average stock is outperforming, this will remain a tailwind for these strategies, all else being equal.

In OPS’s November 2022 “Portfolio Recipes” webinar, we talk to two of these boutique/emerging managers in our latest “Diversified Boutique” Portfolio Recipe: Main Management and AAMA.

Speaking of the Portfolio Recipe webinar series, on December 14 we’ll have “'Most Popular of 2022 - The Downside Protection Portfolio”. A little early holiday spirit.

Key interest rates:

Deeper Dive

When it comes to fixed income, one key market to watch – for a possible signal into future stock market direction – is high yield. Call it the canary in the coal mine. If high yield yields are rising faster than Treasury yields (or falling less slowly), then yield spreads are rising. Rising high yield spreads are considered by many to be a leading indicator of stock market weakness (Lutz, Nov. 2022). Well, according to a November 29, 2022 chart from Lutz, high yield spreads have been dropping of late. That’s a good sign.

As for short-term rates, and what many stock market observers are watching, what do the markets currently think of Fed policy according to CME Group’s FedWatch tool?

  • For the December 14 Fed meeting, it is now a 75% chance for a 50 basis point hike: 25% chance for a 75 basis point hike (CME Group, Dec. 2022). Really no change in those numbers week over week (CME Group, Dec. 2022).
  • Looking out to next March, the market is currently estimating a terminal Fed Funds rate that is 1.00-1.25% from where it is now (currently at 3.75-4.00) (CME Group, Dec. 2022).
  • In general, a potential pause in rate hikes in May and the potential for actual rate cuts in November 2023, according to Charlie Bilello’s tweet on November 29, 2022.
  • Are these expectations too optimistic? We need better inflation data to make these expectations reality.
AAII Sentiment among stock market investors remains negative (AAII, Dec. 2022). In fact, according to Charlie Bilello, in his November 29 tweet: “AAII Bears have outnumbered Bulls in the AAII sentiment poll for 35 consecutive weeks (since April 7). With data going back to 1987, that's now the longest streak of negativity that we've seen.”  

Regarding flows, according to a December 2022 report from Strategas: “Believe it or not, domestic equity mutual funds and ETFs have seen net inflows of $35 billion this year. And, despite the fact that it has declined 62% YTD, the Ark Innovation Fund has seen net inflows of $1.6 bn. These are not typically the stuff of which bottoms are made. While a case can be made that higher rates and higher inflation have been priced into equities, it is more difficult to say that the potential for a decline in earnings has been.”

The ETF industry remains strong with more new products coming, according to an ETF Think Tank post from November 28, 2022. As of last week, the 1-year Open-to-Close ratio rose to 2.93 (basically three new ETFs opening for each fund closing) and the new total for US ETFs is 3,072 (ETF Think Tank, Nov. 2022).

ETF flows are hot, but you know what else is hot? Direct Indexing. To meet the demand, nearly 50% of asset managers and 75% of managed account sponsors cited direct-index SMAs as a top product development priority this year, according to a white paper by Cerulli Associates from December 1, 2022.

What are the top concerns to professional investors and retail investors? According to a November 28, 2022 article in The Wealth Advisor, stagflation (high inflation, lower growth) leads the way, followed by Deflationary Recession (deflation, economic contraction). In distant third place is Goldilocks Growth (lower inflation, good economic growth) and Runaway Inflation and Strong Growth (new inflation highs and strong nominal economic growth) (The Wealth Advisor, Nov. 2022).

Given that I’m a betting man, I would also rank Stagflation as the top economic scenario, but I would take a lower conviction “take the under” on that scenario (in other words I think there’s a less than the 50% odds of stagflation that professional investors give it). I would, however, give a higher conviction “under” on Deflationary Recession and take the overs on the last two scenarios. While the odds might suggest economic weakness in 2023, I just don’t think it’s a slam dunk like most seem to think it is. There is simply too much economic momentum heading into year-end. In addition, I just don’t think inflation is whipped yet. In fact, I think’s there’s still a chance (albeit low chance) that we see new highs in the key inflation metrics.

Looking at scenarios – considering what is probable (“baseline”) and what is possible are key factors in managing investment portfolios and in investment counseling conversations. That’s the key behind Orion Risk Intelligence and its new podcast series “Weighing the Risks”. Check it out – subscribe if you like it – and give us feedback. It’s off to a great start.

On that last point, considering market probabilities and possibilities were a key part of how my past investment teams thought about the markets and how to “forecast” future scenarios. While, as active managers we clearly had views and made sure they were articulated in portfolios, we did our forecasts in terms of probabilities. In our view, it was a humble exercise recognizing the only certainty is uncertainty. It also stressed why diversification is always important.

As an example of setting the stage for thinking in terms of probabilities, we created a slide for our newly updated OPS Quarterly Reference Guide showing trailing 12-month returns going all the back to 1871, based on stock market data from Yale University Professor of Economics Robert Shiller (March 2022). For example, over 30% of the time since 1871 the US stock market was up over 20% in terms of year-over-year returns; the market was down about over 27% of the time (Shiller, March 2022). Given how remarkable the current economic and market environment is, I would take the “over” on both of those for 2023 (if I was asked).

Last week’s economic data (with linked commentary from OPS partner First Trust):

  • Personal Income– rose by +0.7%, beating the consensus expectation of +0.4% (First Trust, Dec. 2022).
  • ISM Manufacturing Index- declined to 49.0 in November, lagging the consensus expected 49.7 (levels higher than 50 signal expansion; levels below 50 signal contraction) (First Trust, Dec. 2022).
  • November unemployment report– Nonfarm payrolls increased by 263,000 compared to consensus estimate of 200,000 (First Trust, Dec. 2022). The labor market remains stronger than most expect – and the Federal Reserve desires (First Trust, Dec. 2022).
Bottom line, the labor market remains strong. Sure, there are sensational headlines of lay-offs, and it’s reasonable to expect more lay-offs ahead, but check out this info from CNBC on December 1, 2022: Another jobs report from outplacement firm Challenger, Gray & Christmas indicated that planned layoffs increased 127% on a monthly basis in November and were up 417% from a year ago. Even with the massive surge, the firm noted the year-to-date layoff total is the second lowest ever in a data set that dates to 1993. 

Fairly slow week on the economic calendar posted by Calculated Risk this week:

  • Thursday, December 8: Initial jobless claims
Despite all the concerns about economic weakness in the near future, it should be noted that this quarter is looking great so far. The Atlanta Fed’s GDPNow‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) for Q4 2022 is currently up to 2.8% as of December 1, 2022. This is a decent decline from the November 23 estimate of 4.8% (GDPNow, Nov. 2022). This estimate decrease from GDPNow’s model appears to be based primarily on the decrease in PCE.

Fourth-quarter 2022 earnings season (I/B/E/S data from Refinitiv):

  • 3Q22 Y/Y earnings are expected to be 4.4%; excluding the energy sector, the Y/Y earnings estimate is -3.4% (Refinitiv, Dec. 2022).
  • Of the 494 companies in the S&P 500 that have reported earnings to date for 22Q3, 71.1% have reported earnings above analyst estimates (Refinitiv, Dec. 2022). This compares to a long-term average of 66.2% and prior four-quarter average of 78.1% (Refinitiv, Dec. 2022).
  • During the week of Dec. 5, seven S&P 500 companies are expected to report quarterly earnings (Refinitiv, Dec. 2022).
Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager
  • Cryptocurrency prices moved higher last week, with Bitcoin trading up 3% to around $17,000; Ethereum added on 5% to trade near $1,300; Uniswap jumped 13%, and Solana fell another -5% (CoinMarketCap, Dec. 2022).
  • Crypto lender BlockFi officially filed for bankruptcy protection last week as FTX and Alameda owe BlockFi more than $1 billion (CoinMarketCap, Dec. 2022). Former FTX CEO Sam Bankman-Fried spoke to a number of reporters last week, admitting to a failure of oversight on his part but claiming ignorance on commingling of funds (CoinMarketCap, Dec. 2022). JP Morgan was granted a registered US Trademark for their crypto wallet (from a BlockWorks LinkedIn post in November). Research shows that a record number of Bitcoin units (78%!) have not transacted for months, indicating that retail investors are not selling their Bitcoin in this bear market (ZeroHedge, Nov. 2022). Fidelity opened retail crypto trading accounts after creating a large wait list last month (CoinMarketCap, Dec. 2022).
  • There were no new digital asset ETF developments (ETF.com, Dec. 2022).
Additional Resources

Crypto has been hit hard, but don’t count it out yet. At least that’s apparently the thinking by some of the largest firms like Fidelity and BlackRock (FundFire, Dec. 2022).

"Some things are a job, others are a craft. The primary difference is not the task, but the enthusiasm and curiosity put into the task. The more engaged and interested you are, the more it becomes a craft." From James Clear's December 1, 2022 post.

Last week’s Orion's "The Weighing Machine" podcast was with Capital Group’s (American Funds) Colleen Ambrose regarding fixed income. This week’s new podcast is with DFA’s Bryce Skaff. This interview took place a few months ago, but we’re publishing it the same week that DFA models hit the platform. This was a fun interview. Bryce is a big deal, and you can hear why. And he’s a legit surfer dude! If you haven’t done so already, please subscribe/follow the podcast. Thanks for listening!

Join us for Orion’s Ascent 2023 Advisor Conference, being held at the World Center Marriott in Orlando, FL from February 27-March 2! Don’t wait! Register Now! Sign up before December 31 and receive early bird pricing. While registering, book your room at the Orlando World Center Marriott for Orion’s discounted rate. The best part about Ascent? We’ve put together a lineup of 80+ sessions, which guarantees that there will be something there for everyone. Get ready to customize your Ascent 2023 schedule and dive into our Content Catalogue to pick from our library of content tracks that include: Orion Core Tech, Behavioral Finance, Growth, Portfolio Creation, M&A, Risk Intelligence, CRM/Marketing, Data, Trading & Compliance. Ready to explore? Check out the full content catalogue at Ascent.Orion.com.

Another goodie from Strategas is a chart on “Real Estate & Equities Percent of Total Assets By Wealth Percentile Group” in a November report, this time looking at how different wealth percentile groups have their total assets allocated between real estate and financial assets.

Lots of awesome pictures in AP's Top Photos of 2022 including one of a ski-jumper in Austria. Be warned – while there are pictures of sheer beauty on this list, there are also lots of tragic ones too. You’ll be moved in various ways seeing this list.

Speaking of interesting images that might impact how you think, there’s a new series on Disney+ which will have a few tips on how we can all perform at a higher level. I’ve seen the first few episodes – I’m watching the rest: Chris Hemsworth's Limitless. For some reason, my wife likes the series too!

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.

2363-OPS-12/6/2022

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/.