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Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 59

Last week saw global markets decline with US indices down 1-2%, the S&P 500 entering correction territory, crude oil prices surging above $130/barrel, strong US employment data exceeding expectations, a drop in 1Q22 GDP estimates to 0.0%, continued commodity gains including gold surpassing $2,000/oz, and anticipation of Thursday’s CPI report amid geopolitical uncertainties impacting market sentiment.

  • Global markets started the week off negatively, with crude oil prices rising above $130/barrel, their highest since 2008. Gas prices also surged to a national average of $4.06 a gallon.
  • US market indices were down 1-2% last week; developed international stocks fell 6-7%; emerging markets dropped about 2% overall.
  • The S&P 500 entered “correction” territory (down over 10% from highs), and some European markets are now in bear markets (down over 20% from highs).
  • Year-to-date, the US market (Russell 3000) is down nearly 10%, but high dividend stocks are up over 2%.
  • Value stocks have outperformed recently (by over 11% YTD), mainly due to the energy sector. Financials are lagging, especially as the yield curve flattens. Financials typically perform better when yield curves widen.
  • Commodities have performed well this year: the aggregate index is up over 28%, crude oil is up over 50%, and gold broke the $2,000/oz barrier for the first time since August 2020.
  • Bond market volatility was high, but Ten Year Treasury Yields dropped over 0.25% to close at 1.72%.
  • The employment report was strong:
    • Nonfarm payrolls increased by 678,000 in February, above the expected 423,000.
    • Unemployment fell to 3.8% from 4.0%.
    • Average hourly earnings are up 5.1% year-over-year.
    • Aggregate hours rose 0.8% in February, up 5.5% from a year ago.
    • 15.1% of unemployed quit their prior job, tying the highest level in 20 years.
  • The 1Q22 GDP estimate continues to drop, now at 0.0% (down from 0.6% the week before).
  • Geopolitical news is likely to drive markets, but this week’s top economic release is Thursday’s CPI number:
    • Consensus: 0.8% increase in CPI, 0.5% in core CPI. Year-over-year, CPI expected up 7.9%, core CPI up 6.4%.
  • 4Q21 earnings growth was over 30% for the fourth straight quarter, but 1Q22 earnings growth is estimated at less than 5%. If 4.8% is the actual growth rate, it will be the lowest since Q4 2020.
  • The weekly COVID Tracker from First Trust has ended, but the hope is that COVID can now be put in the rear-view mirror.
  • The book "Triumph of the Optimists" is recommended for understanding the importance of staying invested. Credit Suisse’s annual update to its Global Investment Returns Yearbook highlights:
    • Over 122 years, global equities have provided an annualized real USD return of 5.3%, compared to 2.0% for bonds and 0.7% for bills.
    • Equities have outperformed bonds, bills, and inflation in all 35 markets.
    • The estimated future equity risk premium is around 3.5%.
    • Diversification across stocks, countries, and assets has improved return-risk tradeoff.
  • Ben Carlson’s article “There is No Hedge for Everything” notes that while inflation isn’t a tailwind for stocks, it’s not a reason to abandon the market.
  • The AAII Investor Sentiment Survey remains net bearish, which historically has preceded above-average stock market gains.
  • Equity allocations remain near all-time highs, but risk asset flows are at their strongest outflows since April 2020. However, ETF flows remain positive for the year, with value funds seeing inflows and growth funds outflows.

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

  • Crypto prices were volatile, but Bitcoin ended the week nearly 1% higher (just under $39k). Ethereum and Cardano were down 3%, Avalanche down 2%, Solana down 1%, and Terra’s LUNA token up nearly 9%.
  • Ukraine canceled a planned “airdrop” for crypto donors. There was discussion about banning Russian users from crypto exchanges, but this was declined. The US Treasury is increasing tracking of cryptocurrencies to prevent sanction evasion.
  • Schwab filed for a crypto economy ETF, marking a significant move as Schwab is typically conservative with new product launches.

Additional Resources

  • This week on Orion's The Weighing Machine podcast: Eben Burr, president of Toews Asset Management, discusses Jeremy Grantham’s “superbubble call,” hedging equity portfolios, and more.
  • Morgan Housel’s article “Make your point and get out of the way” discusses online reading habits and book completion rates.
  • Tim Ferriss interviewed Morgan Housel on “The Psychology of Money.”
  • The latest Batman movie is out; the author’s favorite Batman is Christian Bale.
  • The movie "Atlantis" (2019) is about Ukraine after a Russian attack.
  • The website "14-years-of-brain-pickings" contains inspiring content, including a review of Viktor Frankl’s "Yes to Life!"
  • For more resources, check out the Financial Advisor Success Hub, and feedback is welcome at rusty@orion.com or ben.vaske@orion.com.

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