Market Insights: Last Week in Review with Rusty Vanneman, Vol. 80 | Orion

Hope your weekend, or holiday, is going well. It’s quiet here. Over the past week, one child went back to high school, one is now at school in Norway, and one off to the University of Kansas. Max, our goldendoodle, is wondering where the heck everybody went!

Last week, the US Total Market (Morningstar indices) lost more than 1%. Losses were broad-based, with value stocks losing the least.

• ​The overall bond market did have a slight gain (Morningstar, Aug. 2022).
• ​Diversified Alternatives were the star performers last week, up nearly 1% (Morningstar, Aug. 2022).

Despite the recent weakness, it has been a solid month and quarter for the financial markets and balanced portfolios. Nearly everything is up (Morningstar, Aug. 2022), and up nicely at that.

• ​US Growth stocks are still up nearly 17% this quarter. Small caps are also up more than 13% (Morningstar, Aug. 2022).
• ​International stocks are lagging, though still gaining ground this quarter (Morningstar, Aug. 2022).
• ​Gold mining stocks, however, are down nearly 8% this quarter. Now down 21% for the year (Morningstar, Aug. 2022).

The Ten-year Treasury yields last week finished at 2.99% (up 14 basis points over the last week) (Yahoo! Finance, Aug. 2022). The range last week was from 2.76% to 3.00% (Yahoo! Finance, Aug. 2022).

• ​The yield-to-maturity on the Bloomberg Aggregate Bond Index was 3.76% as of August 19 (Bloomberg, Aug. 2022). The cycle high was on June 14 at 03% (Bloomberg, Aug. 2022).
• ​The average money market yield is now 96% as of Aug. 21 (Crane Data, Aug. 2022).
• ​The average 30-year fixed mortgage rate increased to 5.60% last week (Bankrate, Aug. 2022).

Deeper Dive

It looks like the contrarian reads from individual investor sentiments worked again (so far) this year. According to Fidelity’s Director of Global Macro Jurrien Timmer in his LinkedIn post on Aug. 17, 2022:

“The bearish extreme that we saw in June has largely been corrected. At the June low, the AAII survey flashed one of the most oversold readings in history, with 59% of those surveyed being bearish at the time. That’s now down to a more normal (but not optimistic) 37%.”

Speaking of sentiment, here’s a fascinating tidbit from the July 2022 BofA Global Fund Manager Survey from the daily commentary of Bloomberg's John Authers on Aug. 17, 2022. For the first time since May 20, and only the second time since Dec. 2010, professional money managers think that Growth will outperform Value. Note that this is a sentiment survey and not a holdings survey, but it’s fascinating, nonetheless.

Also from the July 2022 BofA Global Fund Manager Survey, money managers still believe the biggest risk to the markets is inflation.

And speaking of inflation, there was a tweet from Liz Ann Sonders at Schwab on Aug. 11, 2022 — bottom line, inflation may have peaked, but it will likely remain high for a while.

It has been a tough year for investment flows, especially July, according to Topdown Charts’ Callum Thomas in his Weekly S&P500 ChartStorm post on LinkedIn on Aug. 14, 2022. The one bright spot this year has been ETFs (Topdown Charts, Aug. 2022).

Staying on the positive ETF flows story, according to Goldman Sachs on Aug. 20, 2022:

“US ETFs saw +$8bn of net inflows in the week ending Aug 18th (MTD +$46bn / YTD +$376bn). Equity inflows (+$9.6bn) were partially offset by Fixed Income (-$1.3bn) and Commodity (-$400mm) outflows. Volumes fell considerably this past week with Thursday seeing the lightest ETF $ turnover day of the year = $102bn (vs $202bn ytd avg). This was alongside broad equity tape $ volumes falling to ytd lows.”

Good news and potentially bad news statistic. Good news: US companies remain near their all-time profit margins (Bloomberg, July 2022). That’s a leading fundamental reason why stock valuations remain above average — their profitability remains above average. The potential, however, is that profit margins move lower. Profit margins are often considered to be one of the most mean-reverting data series (for example, when it’s low, expect it to rise, and vice versa). Then again, one could have said that two years ago — before profit margins blew out to new all-time highs! Per the Felder Report on Aug. 17, 2022, rising labor costs might put a dent into these profit margins.

Last week’s economic numbers included July Existing Home Sales, as seen in highlights from the report (via First Trust on Aug. 18, 2022):

• ​Sales are down 20.2% versus a year ago (First Trust, Aug. 2022).
• ​The median price of an existing home fell to $403,800 in July (not seasonally adjusted) but is up 10.8% versus a year ago (First Trust, Aug. 2022).
• ​Despite the lack of options, demand remains strong, with buyer urgency so high in July that 82% of existing homes sold were on the market for less than a month. While sales are clearly under pressure, this is not a repeat of 2007-09. We do not foresee a widespread collapse in home sales even with higher mortgage rates, though it is likely that existing home sales wind up lower in 2022 than 2021 (First Trust, Aug. 2022).

On a related note, mortgage demand hit a 22-year low (@StealthQE4 on Twitter, Aug. 17, 2022).

On this week’s economic schedule posted on Calculated Risk’s blog, the key reports include July New Home sales (Wednesday) and the second estimate of second-quarter GDP (Thursday). Fed Chair Jerome Powell will speak on the "Economic Outlook" at the Jackson Hole Symposium on Friday.

The Atlanta Fed’s GDPNow estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) decreased last week (Aug. 2022). The third-quarter 2022 GDP estimate is now at +1.6% (down 0.9% from last week) as of Aug. 17, 2022 (GDPNow, Aug. 2022).

So while economic fears seem to dominate, did you know that, according to David Rovella’s Bloomberg post on Aug. 19, 2022, 26 different states reached all-time record unemployment rate lows this year? Another wow.

As for earnings, second-quarter earnings according to I/B/E/S data from Refinitiv as of Aug. 19, 2022:

• ​22Q2 Y/Y earnings are expected to be 8.8% (down 0.9% from last week). Excluding the energy sector, the Y/Y earnings estimate is -1.8% (also down 0.9% last week). (Refinitiv, Aug. 2022)
• ​Of the 474 companies in the S&P 500 that have reported earnings to date for 22Q2, 77.8% have reported earnings above analyst estimates. This compares to a long-term average of 66.1% and prior four quarter average of 80.6%. (Refinitiv, Aug. 2022)
• ​During the week of Aug. 22, 12 S&P 500 companies are expected to report quarterly earnings. (Refinitiv, Aug. 2022)

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

• ​Cryptocurrency prices gave up recent gains last week. Bitcoin fell over 11% to settle around $21,500. Ethereum fell 16%. Other high market cap coins like Cardano, Solana, Dogecoin, Polkadot, and Avalanche fell 15-20%. (CoinMarketCap, Aug. 2022)
• ​Many crypto miners have sold more Bitcoin than they mined in recent months to stay afloat. Two recent corporate acquisitions in the digital asset space were cancelled or stopped last week. The CME group announced they will add Ethereum options in September. The Fed released guidelines for crypto banks. (Decrypt, Aug. 2022)
• ​Blackrock launched a Future Financial and Technology ETF (BPAY) last week. While more of a fintech fund than crypto specific, there will be some holdings focused on digital assets. (Arcane Research, Aug. 2022)

Additional Resources

"Risk is what’s left over when you think you’ve thought of everything." — Morgan Housel

A question posted on Twitter via @pickover on Aug. 16, 2022, touches on the key topic of investor risk tolerance, but results may vary depending on the dollar amounts.

Last week’s Orion's The Weighing Machine podcast with Vanguard’s Colleen Jaconetti was on the important topic of retirement spending. This week features Kate Guillen from Simplicity Operations Management discussing ways to use Redtail.

Despite recession fears, Americans spend $314/month on impulse purchases (CNBC’s Jessica Dickler on Aug. 20, 2022).

Pearl's Golden Rule of Exercise — move every day! Less than 25% of Americans meet the federal guidelines for both aerobic and muscle-strengthening. More people are active in the western states of the country, while the southeast tends to be less active.

As they say: Never Give Up! (@buitengebieden on Twitter, Aug. 19, 2022)

A concerning trend: old music is killing new music. According to an article in The Atlantic by Ted Gioia from Jan. 2022:

Old songs now represent 70 percent of the U.S. music market, according to the latest numbers from MRC Data, a music-analytics firm. Those who make a living from new music—especially that endangered species known as the working musician—should look at these figures with fear and trembling. But the news gets worse: The new-music market is shrinking. All the growth in the market is coming from old songs.

Speaking of college sports, the Nebraska Cornhuskers begin play this coming week in Ireland versus Northwestern. Some people accuse me of drinking a lot of the pre-season hype Kool-Aid but, seriously, given the team’s talent this year, I see no reason why they can’t win the Super Bowl!

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.