Market Insights: Last Week in Review with Rusty Vanneman, CFA, CMT, Vol. 88 | Orion

There were some positive developments out of the UK over the weekend and nothing significant from China. It’s a big week of earnings, including Bank of America, Goldman, Tesla, Netflix, IBM, J&J, Verizon, and Procter and Gamble.

Despite some mid-week strength, including an impressive “reversal day” on Thursday, last Friday’s loss of more than 2% pushed the weekly return negative (-2% for the week).

• ​Value stocks finished the week higher, up nearly 1%; growth stocks lost more than 4%.

YTD Return Highlights:

• ​S&P 500 is down about 24%.
• ​Growth stocks are down about 39%.
• ​Value stocks are down about 11%.

For the year, the asset classes with gains are Commodities (~16%) and Cash (~1%); Energy remains the only positive sector at about +22%.

Deeper Dive

It was quite a week for interest rate volatility:

• ​Ten-year Treasury yields finished at 4.01% (up another 13 basis points over the last week); the highest yield last week was 4.08%—a 15-year high.
  • ​The 10-year yield has now risen for the 11th straight week, the longest streak since the 1970s.
• ​The yield to maturity on the Bloomberg Aggregate Bond Index rose last week to 4.98%, as of October 14, 2022 (up 20 basis points).
• ​The average money market yield rose another 4 basis points last week, finishing at 2.75% as of October 14, 2022.
• ​The average 30-year fixed mortgage rate increased to 7.08% (up 19 basis points) last week.
• ​Mortgage rates hit their highest rates in 20 years.

This has been one of the worst years for 60/40 performance ever. Only the third year since 1926 where both stocks and bonds are down so much and so far.

Another asset class higher this year is the US dollar—it has been strong. Historically, a stronger dollar can be a headwind for future aggregate earnings.

Inflation Data

According to JPMorgan Asset Management’s David Kelly:

“Core CPI inflation may fall more slowly. Shelter accounts for almost 42% of core CPI and the owners’ equivalent rent part of this accounts for more than 30% of core CPI on its own. Both actual rent and owners’ equivalent rent lag the rest of CPI very significantly as they track the increase in rental costs for both new and existing leases. Even when new lease rates begin to fall, the year-over-year change in existing lease rates can remain positive. Recent research by the Dallas Federal Reserve suggests that the year-over-year increase in both actual rent and owners’ equivalent rent won’t peak until the middle of 2023 at levels of close to 8% year-over-year.”

Market Stats

• ​The market cap of Tesla is the same as the entire European banking sector.
• ​The market cap of US equities as a percentage of the MSCI World Index just hit a new record high of 66%.

Value stocks have outperformed this year, but they’re still on sale given historical relative valuations.

Key economic data last week included CPI, which came down year over year, but showed a monthly increase; Core CPI is now at its highest level in 40 years.

The Atlanta Fed’s GDPNow estimate for real GDP growth increased by a few basis points last week to a current estimate of 2.8% for Q3 2022 GDP, as of October 14.

As for the economic calendar, the Fed will release the Industrial Production and Capacity Utilization data on Tuesday, and Existing Home Sales will be released Thursday.

Earnings

• ​22Q3 Y/Y earnings are expected to be 3.6%. Excluding the energy sector, the Y/Y earnings estimate is -3.1%.
• ​Of the 35 companies in the S&P 500 that have reported earnings to date for 22Q3, 68.6% have reported earnings above analyst estimates; this compares to a long-term average of 66.2% and prior four quarter average of 78.1%.
• ​During the week of Oct. 17, 66 S&P 500 companies are expected to report quarterly earnings.

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

• ​Another flat-to-down week for cryptocurrency prices. Bitcoin dropped 1.4% to just over $19,000; Ethereum fell 1% to under $1,300. Most other large coins fared worse, with Ripple and Cardano falling double digits.
• ​Google/Alphabet has partnered with Coinbase to offer crypto payments and enabled Ethereum address search capabilities. Bitcoin’s mining difficulty hit an all-time high last week. Bank of New York Mellon launched a custody service for Bitcoin and Ethereum. Despite these large adoption announcements, crypto prices continue to trade on macro (inflation/Fed) news.
• ​Digital asset ETF news was sparse. Valkyrie announced the closure of their Balance Sheet Opportunities ETF (VBB), which invested in companies that hold Bitcoin on their balance sheets directly or indirectly.

Additional Resources

Ben Bernanke won the Nobel Prize for economics recently, and it’s controversial, but Bloomberg’s chart on “Why People Care About Ben Bernanke” shows why some think he won it.

“Scenarios are to stress testing like photos are to social media.” —Raj Udeshi

Be on the lookout for a new Orion podcast called “Weighing The Risks.” The first edition will be regarding the mid-term election and the special guest star is Matt Bartolini from State Street Advisors.

Last week’s Orion's The Weighing Machine podcast featured Paul Curley, a college savings / 529 expert. The upcoming podcast will feature Glenn Dorsey from Clark Capital, discussing top concerns of investors today.

Financial journalist John Authers has a great daily article on Bloomberg, which often includes a fun segment at the end—recently about “fake bands” like The Monkees, The Wombles, The Rutles, and Spinal Tap.

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.

*See “Rent Inflation Expected to Accelerate Then Moderate in Mid-2023” Xiaoqing Zhou and Jim Dolmas, Federal Reserve Bank of Dallas, August 2022