Happy Thanksgiving Week! For me, this is one of the best weeks of the year. Family, food, and football! In the latter category, we even have the World Cup for this holiday season. Sunday’s World Cup Opening Ceremony (excerpt) was quite beautiful and definitely a tad different. For nearly the next two weeks, we get four WC games a day. Go USA!

As for the markets this week, the U.S. stock and bond markets will be closed on Thursday, Nov. 24, in observance of the Thanksgiving holiday. Trading will also end early on Black Friday, with markets closing at 1 p.m. E.T. The markets should be somewhat quiet, with minutes from the Federal Reserve’s November policy-setting meeting being the key economic update this week.

Last week the overall stock market was slightly lower, led by growth stocks down nearly 3% (Morningstar, Nov. 2022). Value stocks (using Morningstar indices) were slightly higher (Morningstar, Nov. 2022). Value has outperformed growth over all recent shorter time frames going out to three years (Morningstar, Nov. 2022). The 3-year number is a horse race going into month-end though. Currently over that time frame, as of last Friday, value is up 8.1% while growth is up 7.9% (Morningstar, Nov. 2022). This will matter for those who use 3-year performance in their selection process.

Despite the over-all market being down 17% this year and over the last 12 months, value stocks are up nearly 1% year-to-date and up nearly 3% over the last year (Morningstar, Nov. 2022). Among major asset classes, commodities are up 18% YTD and 14% over last year (Morningstar, Nov. 2022). The US dollar is up 11% in both of those time frames as well (Morningstar, Nov. 2022).

As for the dollar, according to BeSpoke, the US Dollar Index was recently crushed, falling over 4% in one week the week before last (Nov. 2022): “That may not sound all that extreme relative to the stock market of 2022 but moves of that magnitude in a currency like the dollar are practically unheard of.  Going back over the last 50 years, last week's decline was the dollar's fourth largest on record and just the sixth time that it fell more than 4% in a single week. Prior to last week, the only other occurrences were in March 2020, March 2009, September 1985, March 1985, and February 1973.”

At this point, it’s been a great month and quarter for the stock market.

  • The S&P is up over 2% in November and nearly 11% for the quarter (Morningstar, Nov. 2022)
  • Bonds are up over 1% for the quarter (Morningstar, Nov. 2022)
Key interest rates:
  • Last week Ten-year Treasury yields finished at 3.82% (up 1 basis point from last week) (Yahoo Finance, Nov. 2022). The highest yield last week was 4.22%; the low was 3.90% (Yahoo Finance, Nov. 2022).
    • This was a slight increase off six-week lows, likely due to growth in retail sales offsetting sentiment around the Fed’s hawkishness from the CPI print two weeks ago (Yahoo Finance, Nov. 2022)
  • The yield to maturity on the Bloomberg Aggregate Bond Index came down last week to 4.78%, as of November 18, 2022 (down 1 basis point) (Bloomberg, Nov. 2022).
  • The average money market yield also rose by 1 basis point last week, finishing at 3.46% as of November 19, 2022 (Crane Data, Nov. 2022). This might be a reason why cash levels are rising!
  • The average 30-year fixed mortgage rate saw a significant decrease last week, now down to 6.85% (Bankrate, Nov. 2022).
Deeper Dive

Strategas Technical Research on the yield curve (i.e., the relationship between long and short-term interest rates) (November 17, 2022):

  • …the 2/10 yield curve is at its deepest inversion of the cycle… and the last 40 years (-85bps in September of 1981). Not to be out done, the 3-month / 10-year curve is at -50bps for the first time this cycle the Fed funds rate is above both 10 and 30-year yields. 
Love my I-bonds. Here is a quick and easy review on some common questions regarding I-bonds, including how the interest changes every six months (Wealth Advisor, November 8, 2022).

It could be argued that guessing Fed policy is one of the biggest drivers in the market right now. What is the CME Group FedWatch tool currently showing?

  • For the December Fed meeting, it is now a 75% chance for a 50 basis point hike: 25% chance for a 75 basis point hike (CME Group, Nov. 2022).
  • Looking out to next May, the market is currently estimating a terminal Fed Funds rate that is 1.25% from where it is now (3.75-4.00) (CME Group, Nov. 2022).
Strategas Economics Research on inflation and Fed Policy (November 16, 2022):
  • “Peak inflation, yes. The U.S. CPI surprised on the downside... (but is) mission accomplished, no. To be fair, there’s been a trend change in U.S. inflation & rate hikes can likely slow down. But we are still looking at policy tightening (and staying tight) in 2023. We look for a +50 bp hike on Dec 14th, with a terminal fed funds rate of 5-5.25% in early 2023.”
Changing gears back to the stock market… could we be in a repeat of the Nifty-Fifty Bear Market of the 1970s? None of us hope so but, either way, here’s an article on the classic 1974 memo from the former chairman of the Capital Group (American Funds) called "Courage, We've Been Here Before", otherwise known as “The Fullerton Letter” (Capital Group, Nov. 2022). For the actual letter, here's the link. The two-page letter is loaded with nuggets, led by:
  • My message to you, therefore, is: “Courage! We have been here before. Bear markets have lasted this long before. Well-managed mutual funds have gone down this much before. And shareholders in those funds and we the industry survived and prospered.”
The new Orion Portfolio Solutions (OPS) Quarterly Reference Guide for Q4 2022 is out! Thanks to all who helped produce it, including the countless hours Ben put into this. There are even some new slides this quarter. Please keep the ideas and feedback coming – Ben wants more!

It’s that time of year that investment firms roll out their long-term expected returns, otherwise known as Capital Market Assumptions (CMAs). This includes Northern Trust, who forecasts 6% returns for U.S. Equities in a Financial Advisor article on November 11, 2022:

  • “The next five years will likely result in lower portfolio returns thanks to slow growth, inflation and related tightened monetary policy, according to investment strategists at Northern Trust Asset Management. Michael Hunstad, the firm's chief investment officer of global equities, said he thinks U.S. equities returns will be “lower, but still acceptable,” with total returns over the next five years at 6.0%. Fixed income, meanwhile, will settle at 3.7%, he said, adding that a 60/40 portfolio should yield 5.1%. Some real assets, however, can offer a boost, with natural resources predicted at a five-year return of 7.3%”
One of the interesting and thought-provoking (though usually very short-term in his trading decisions) weekly reads on LinkedIn (Sunday night publications) is Florida Republic Trader, Garrett Baldwin. On November 13, 2022, he had what he thought were the major charts to consider, including the continued rotation into natural resources (both hard assets and the companies centered around them).
  • “As the world centers around hard commodities, the U.S. dollar and the financialization of the economy will find new pressures. The rotation toward commodities is undoubtedly underway. Remember, central banks around the globe just bought the largest amount of gold in 55 years during the third quarter of 2022. End of the petrodollar? Is the dollar starting to snap? We’ll see.”
What asset classes make up real assets? Want some Weighing Machine podcasts on the topics? Strategas ETF Flow Monitor Research on equity flows on November 15, 2022:
  • …renewed acceleration of equity ETF inflows. (Recent days had some of the strongest flows ever) and reminiscent of the wave to equity ETFs following the 2020 election and vaccine efficacy news (+$195 Bn in the 65-days following). It’s not just the last two days though… equity ETFs have taken in nearly +$90 Bn since the October CPI miss roughly a month ago, larger than the flows during both major bear market rallies this year. The 4th quarter has a strong seasonal tendency for both performance and flows, with the potential for a “FOMO” rally opening the gates to further inflows. 
Despite the great flows into ETF, did you know that “28 Active Fund Shops are on Pace for Worst Sales Year Ever”, according to an Ignites post on LinkedIn on November 16, 2022? The shops include Vanguard, Fidelity, BlackRock and T. Rowe Price.

How much of the market is now passively managed? Though mutual fund and ETF assets are only about 15% indexed, once you bring in institutional investors like pensions/etc., the number is estimated to be as high as 35% – and rising (Bloomberg, Sept. 2022).

Here’s an excellent overview of the upcoming mutual fund capital gains distributions in plain language from the Independent Vanguard Adviser on November 15, 2022 – and again this is a catalyst to “put money in motion” this time of year toward more tax-friendly vehicles such as custom/direct indexing and ETFs. If not now, I’m sure more taxable investors will move toward custom indexing/ETFs in the following year(s).

Given the bear market this year, a lot of “money is in motion”. Three Reasons Why Clients Ditch Advisors During Bear Markets from a Financial Advisor article on October 24, 2022:

  1. Poor communication,
  2. Broken promises,
  3. A lack of ideas account for most departures.
“We see more movement in bear markets than at any other time,” said Peter Mallouk, president and CEO of Creative Planning in Overland Park, Kan., which globally manages $225 billion in assets, $135 billion of which belong to private investors (Financial Advisor, Oct. 2022). Mallouk said the biggest growth years for his firm, acquired in 2004, were marked by Covid—“the best twelve months we’ve ever had”—and the Global Financial Crisis (Financial Advisor, Oct. 2022).

Last week, it was a busy week of economic data with arguably the highlight being the Producer Price Index which pleasantly surprised – and another potential clue that inflation might have peaked (First Trust Data Watch, November 15, 2022). We also had plenty of housing data, including Housing Starts (First Trust Data Watch, November 17, 2022). The housing sector continues to slow, but with mortgage rates recently dropping, look for less-bad data soon (First Trust, Nov. 2022).

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

  • Wednesday, November 23: New home sales for October
  • Wednesday, November 23: Durable Goods Orders
Despite all the concerns about economic weakness in the near future, it should be noted that this quarter is looking great so far (GDPNow, Nov. 2022). 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 at 4.2% as of November 17, 2022 (GDPNow, Nov. 2022).

As for corporate earnings, third-quarter earnings according to I/B/E/S earnings data from Refinitiv:

  • 22Q3 Y/Y earnings are expected to be 4.2%; excluding the energy sector, the Y/Y earnings estimate is -3.6% (Refinitiv, Nov. 2022).
  • Of the 475 companies in the S&P 500 that have reported earnings to-date for 22Q3, 70.3% have reported earnings above analyst estimates (Refinitiv, Nov. 2022). This compares to a long-term average of 66.2% and prior four quarter average of 78.1% (Refinitiv, Nov. 2022).
  • During the week of November 21, ten S&P 500 companies are expected to report quarterly earnings (Refinitiv, Nov. 2022).
Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager
  • Cryptocurrency prices somewhat stabilized last week (Decrypt, Nov. 2022). Bitcoin was flat on the week to hover around $16,500; Ethereum fell 4%, Litecoin gained nearly 8%, while other major coins were mostly down (Decrypt, Nov. 2022).
  • FTX continues to dominate the news flow in the digital asset universe. Lending and earnings platform BlockFi – which was “saved” by FTX earlier this year following the three arrows blow up – is suspending customer withdrawals (Arcane Research, Nov. 2022). While they deny claims that the majority of assets are tied up in FTX, they are considering bankruptcy protection (Arcane Research, Nov. 2022). John J. Ray III was appointed CEO of FTX to unravel and unwind the firm, similar to what he did in 2001 with Enron (Arcane Research, Nov. 2022). Bankruptcy filings show that FTX has more than $9 Billion in liabilities spread out amongst at least 100,000 creditors… (Arcane Research, Nov. 2022).
  • The largest cryptocurrency fund in the world, GBTC, has blown out to a 40% discount to net asset value (Financial Times, Nov. 2022). Bitcoin ETF issuer Valkyrie announced layoffs (alongside many firms in the space) (ETF.com, Nov. 2022).
Additional Resources

“It seems to me; the pain trade remains a Q4 rally... offsides could lead to FOMO (Fear of Missing Out).” ~ RenMac’s Eric Boucher (LinkedIn, Nov. 2022).  

Hear about the new holiday from Toews Asset Management’s LinkedIn post on November 16, 2022? It’s one I can celebrate – National Investment Risk Management Day, with its inaugural day of celebration on January 19.

Last week’s Orion's The Weighing Machine podcast was with Sam Lau from DoubleLine. We talked fixed income – and a whole lot more. Sam works with Jeff Gundlach and is also a co-host of the Sherman Show podcast. This coming week’s podcast will be Ocean Park’s new CIO James St. Aubin and co-founder Dr. Ken Sleeper. The Ocean Park podcasts are popular with TWM listeners and this was another solid one, in my opinion. If you haven’t done so already, please subscribe/follow the podcast. Thanks for listening!

The next "Weighing The Risks" podcast that will be published on November 21. Our special guest is Kim Arthur from Main Management, and the topic is: “Geopolitical Turbulence: Prepare for the Future by Stress-Testing Different Scenarios”. Kim, as always, was well prepared, a great guest, and gave plenty of talking points to consider when talking to advisors and investors. He’s good. Please subscribe to this podcast too!

Orion’s 2023 Ascent conference is all about helping you achieve more. It will be February 27–March 2 at the World Center Marriott in Orlando, FL. Don’t wait! Register for Ascent before November 30 and receive early bird pricing.

Financial wellness is important. Did you know that “Employers Are Losing Millions of Dollars in Lost Productivity Because Employees are Financially Unwell”, according to a LinkedIn post by Hussain Zaidi on November 14, 2022? According to a John Hancock study, “Another rising cost for employers: financial stress”, financial un-wellness costs employers $2,400 per employee per year, up 26% from pre-pandemic years (Hussain Zaidi, November 14, 2022).

Ben Carlson on A Wealth of Common Sense on November 11, 2022, had yet another great daily (aren’t nearly all of them?) on personal finance. First, how do Americans spend their money? How does your household compare?

And then there is this chart from Ben Carlson on housing and why supplies still remain tight – and why there’s likely a floor to housing prices, at least nationally (A Wealth of Common Sense, Nov. 2022).

Despite extreme political rhetoric, most Americans are happy with their lives, according to The Prof G Show – Scott Galloway on YouTube, November 14, 2022.

  • Today, 85% of Americans feel happy with how their lives are going.
  • Their satisfaction with the direction of the U.S. has varied wildly — as high as 70 percent in the early 2000s and as low as 11% in 2021.
  • Harsh discourse and political violence belie an overall high satisfaction with the lives we are living in the U.S.
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.

 

2280-OPS-11/23/2022

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.

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