May 1 • 7M

Letting The Air Out.

05/01/2022. Catch up with all you need to know from the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.

 
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In Angles, Anglia Advisors founder Simon Brady CFP® talks about financial markets. This podcast is informational only and should not be used as the sole basis for making any investment decision.

“We’re in a world-wide tightening cycle now, and so we have to let the air out of many of these assets” said a senior market analyst last week and it handily sums up what is going on across all markets at the moment.

The last time the stock market began a year this badly, World War II hadn’t even started yet. Bonds haven’t begun a year this badly since Madonna was in Vogue in 1990.

This toxic combination has meant that lower stock/higher bond portfolios, specifically designed to protect against stock market declines, are suffering as much as their all-stock cousins as the price of bonds is also simultaneously being driven lower by rising interest rates, completely nullifying their traditional role as a stable counterweight to falling stocks. Indeed, bonds are just as responsible as stocks for the fall in portfolio values so far in 2022. I’ll have more to say on this later in this week’s report (spoiler: there’s a silver lining), but this is something that diversified investors haven’t had to deal with in our lifetimes.

Geopolitically, it was not a good week either. Two months into the invasion, Putin largely eliminated a diplomatic solution to the Ukraine conflict meaning that it is likely to rage on for months to come, which is another headwind on growth and also an upward influence on inflation, a double negative for markets right now. It also increases the likelihood of a broad European recession. Also, European energy companies folding to Kremlin demands and agreeing to pay for natural gas shipments in rubles rather than dollars or Euros risks prolonging the war as it funds Russia’s aggression and potentially breaks sanctions.

China is doubling down on its “Zero COVID” policy, whereby it shuts down huge cities and essentially causes economic “brown outs” in an attempt to stop the spread of the disease. And since that’s a futile strategy that won’t work, markets are becoming increasingly concerned that the longer the Chinese keep trying, the more delayed a return to normal supply chain conditions will become (which will keep inflation pressure elevated). And if the Chinese economy plunges into recession, well that’s bad news bears for everyone.

The news required to alleviate these conditions is essentially threefold .. 1) China reverses its “Zero COVID” policy or COVID subsides massively so there are no more lockdown threats, 2) Russia and Ukraine declare a ceasefire or truce, 3) the Fed backs off its recent hawkish rhetoric. Unfortunately, none of these seem very likely near term, and until at least a couple of them come to pass, it’ll be tough for stocks to mount a real, sustainable rally.

Apple, Amazon, Microsoft and Intel all failed to impress investors with their earnings and/or guidance last week, with Amazon particularly harshly punished. They join a distinguished list of big tech firms (notably, Meta-Facebook, Alphabet-Google, Netflix etc.) who have been recently unable to paint a rosy picture about their near-to-medium-term outlooks.

The first estimate of GDP for Q1 2022 came in worse than expected but investors found reasons to not be too worried as the breakdown of the numbers showed that much of the shortfall from expectations stems from short-term issues rather than institutionally engrained problems. And anyhow, this first estimate is going to get revised to within an inch of its life over and over again in the coming months.

On the interest rate front, markets have now priced in three consecutive hikes of half a percentage point at each of the next three Fed meetings, starting this week. But higher rates are ultimately a good thing for holders of bond ETFs because they now earn higher yields on the fixed income portion of their investments.

One year treasury bonds are now yielding 2.0%. The two-year has a yield of 2.6%. Ok, these are not “stick-it-to-your-boss-and-retire-to-your-own-private-island” kind of returns, but they are a lot better than the lows of, respectively, 0.04% and 0.09%, that these bonds were paying not long ago. Anyone bailing out of bond funds now is locking in losses caused by the recent plunge and passing up on the improved income now being paid out by funds holding now-higher-paying bonds.

Your time horizon is everything. Anglia Advisors clients probably know that I don’t shut up about time horizons and various “buckets” for various time-frames. If the time horizon for your investment has shrunk to a matter of, say, eighteen months or less, then it should probably not be in the stock or bond markets at all.

“High Yield” Savings accounts at Marcus, Betterment, Ally, and others are very slightly and very slowly starting to raise their interest rates and offer zero exposure to the stock market and federal insurance. Great for peace of mind, but what they do, however, is grow your money by a fixed 0.50% or 0.60% per year in an 8.50% per year inflation environment. The grass is not always greener ..

Significant market declines have historically always eventually rewarded the hands-off investor with at least a ten year horizon that makes no changes other than maybe actually leaning into the decline and temporarily accelerating their rate of regular systematic periodic purchases of broad or factor-based ETFs. Very few people who have done this during past declines have ever regretted it in the long term.

But our reptilian brains tell us that the right thing to do is to get out and hide under a rock for shelter until the all-clear sounds. The problem with this strategy is that there is no all-clear that sounds to tell you that the skies have cleared. Also most humans (including most professional money managers) cannot get market timing right even once, but for this strategy to work, you have to make two perfect calls. When to get out and then when to get back in. And you’d better have a plan in place for the second before you carry out the first (see this week’s ARTICLE OF THE WEEK below).


Other News:

Follow the money flows? .. Fund investors sold $23.7 billion of US equity (stock) products over the week ending April 20th. That came after cash-ins totaling $15.9 billion in the prior week. This is a notable change from February and March 2022 which saw monthly inflows of $39.6 billion and $41.5 billion respectively.

The fixed income (bond) picture unusually shows a similar pattern, with $9.0 billion of outflows from these fund types during that same week. About the best one can say is that at least it was less-bad than the prior week ($16.4 billion of outflows) and the prior 4-week average of $10.3 billion in outflows.

If dollars are pouring out of both stock funds and bond funds, where are they going? The answer: to a small extent, to commodities and alternative investments like real estate, private equity, art, crypto, I Bonds etc, but mostly to the product that is currently 100% guaranteed to lose money over time, returning a maximum of 0.60% per year at best when inflation is diminishing its value by 8.5% a year: Cash.

Darwinism in stocks .. In a recent post, author and blogger Nick Magiulli cited writer Geoffrey West who stated:

Of the 28,853 companies that traded on U.S. markets since 1950, 22,469 (78 percent) had died by 2009. Of these 45 percent were acquired by or merged with other companies, while only about 9 percent went bankrupt or were liquidated; 3 percent privatized, 0.5 percent underwent leveraged buyouts, 0.5 percent went through reverse acquisitions, and the remainder disappeared for “other reasons.”

West’s research shows that public companies in the U.S. are in a constant state of self-reinvention. Based on his analysis, roughly half of all public U.S. companies in existence today won’t be in existence a decade from now. They will either merge, be acquired, go bankrupt, or find some other way out of the market. Because of this, what we call “the market” changes from year to year. Indeed, this rate of change might actually be accelerating. In 1965 the average company tenure in the S&P 500 was 33 years, but today it’s closer to 20 years.

Why is this important? Because it illustrates why buying an individual stock after a big fall is sooooo much riskier than buying an index fund or broad ETF after a similar plunge. While indexes constantly reconstitute themselves with fresh stocks and are fairly certain to eventually recover from the decline, there is absolutely no such confidence that an individual stock will. Indeed, history tells us that it’s pretty likely to simply disappear somehow.

This is worth bearing in mind as the market once again punishes those who have been averaging down by buying the many dips in the no-profit tech stocks that worked so well in 2020 for over a year now in the hope (and that’s really all it is, hope) that they will eventually recover. There’s a very meaningful chance many of them never will.

Bye-bye meme? .. There were two distinct periods of high retail investor interest in stocks over the last three years. The first was at the time of the March 2020 market incineration due to the emergence of COVID in the west, and the second was during the perfect storm of the last round of stimulus checks, bored Gen Z’ers in lockdown and the market correction in January 2021 which led to the whole meme stock, “Roaring Kitty” debacle. The level of US Google search volumes for the terms “buy stocks” and “invest” (the two most common phrases that correlate with imminent incremental retail investor activity) has now fallen to below 2019 levels, indicating that there are now other shiny new objects rather than stocks hogging the attention of these former keyboard warriors.


Under The Hood:

We’re finishing the calendar month with the S&P 500 index of large cap stocks below its 200-day moving average for the first time in over two years. What’s the significance of a clear downtrend for the S&P 500 and a monthly finish below this level? Well, higher volatility – in both directions – is going to become the new normal for a while now. If you take the 50 best and worst one-day returns for the S&P 500 in stock market history – 47 of them have happened while the S&P 500 was below its 200-day average.

As Josh Brown put it last week; “This is where the drama takes place”.

At the same time, small caps, the most sensitive market cap segment, continue to lead to the downside, suggesting a continuation of deterioration in the other market cap segments. It is difficult to see a light at the end of the tunnel when the legions of damaged stocks, now being joined by large caps including tech giants, keeps growing.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.


The upcoming week’s calendar .. 

More than 150 S&P 500 companies are scheduled to report their results for Q1 2022 this week, including Moderna, Starbucks, Etsy, CVS, EBay, Uber, Pfizer, BP, Biogen, Airbnb, Conoco Phillips, Royal Caribbean, Clorox, Devon Energy, Under Armour, Shell, Expedia, AMD, DuPont, Marathon Petroleum, Paramount and Cigna.

But all that is overshadowed by the Main Event; the Federal Open Market Committee concludes its May two-day meeting on Wednesday, when it will announce its long-awaited latest monetary policy decision. Market pricing overwhelmingly implies expectations of an interest rate increase of half a percentage point, to a Fed Funds target range of 0.75% to 1.0%.

It’s a double-barreled big econo-stat week with the April jobs report coming just two days after the Fed’s interest rate announcement. The average forecast is for a gain of 375k non-farm payrolls, compared with an increase of 431k in March.

And all this data is being piled on top of a market that feels very sensitive to any disappointing news right now, but might also be short-term oversold. Buckle up!

====

THE WEEK:

Relatively speaking ..


- Last week’s best performing US sector: Materials (two biggest holdings: Linde, Sherwin-Williams) - down 0.8%

- Last week’s worst performing US sector: Consumer Discretionary (two biggest holdings: Amazon, Tesla) - down 7.4%

- The NASDAQ-100 once again underperformed the S&P 500

- Emerging Markets fell the least, followed by International Developed Markets with US Markets bringing up the rear

- Mid Caps performed least badly, ahead of Large and Small

- Not much between the respective performances of Growth and Value last week

Technical corner .. 

- The proprietary Lowry's measure for US Market Buying Power fell by 12 points last week while that of US Market Selling Pressure rose by 13 points

SPY, the S&P 500 ETF is below both its 50-day moving average and its 90-day and is also below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 35**. SPY ended the week 13.8% below its all-time high (01/03/2022)

QQQ, the NASDAQ-100 ETF, is below both its 50-day moving average and its 90-day and remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 36**. QQQ ended the week 22.5% below its all-time high (11/19/2021)

** RSI readings range from 0-100. Readings below 30 indicate an over-sold condition, possibly primed for a technical short term rebound and above 70 are considered over-bought, possibly primed for a technical short term decline.


ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across recently.

This week: “In investing, we don’t get to operate backward, we must invest forwards. Without the benefit of knowing what already happened. We do not know what random geopolitical events will occur, what shifts will take place in sentiment and how revenues and margins and profits will change. ALL WE HAVE IS PROCESS. If you do not have a defendable process, you are just spit-balling, speculating, guessing, dart-throwing.”

Barry Ritholtz’s brilliant, stinging and accurate profile of noisy, arrogant investment firms and hedge funds. The list at the end says it all. They can’t answer.


FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).

CAPITAL GAINS TAX

The capital gains tax is the levy on the profit from an investment that is incurred when the investment is sold. The levy can come from both Federal and State taxing authorities.

An investor accrues a capital gain whenever an investment is sold at a profit, after appreciating in value. Conversely, when an investor loses money on an investment and sells at a loss, a capital loss occurs. As an investor, it’s important to know which investments are subject to capital gains taxes, the different rates charged based on your tax bracket and filing status, and the ability to distinguish between various types of capital gains. Also note that unrealized capital gains, which accrue when an investment is not yet sold — and the profits not yet realized — are not subject to the capital gains tax. Capital gains taxes take effect once an investment has been sold, and can be sub-classified into short-term or long-term capital gains depending upon the duration of the investment.

Under current U.S. federal tax policy, the capital gains tax rate applies only to profits from the sale of assets held for more than a year, referred to as long-term capital gains. The current rates are 0%, 15%, or 20%, depending on the taxpayer's tax bracket for that year.

Short-term capital gains tax applies to assets that are sold one year or less from the date they were purchased. This profit is taxed as ordinary income. For almost all taxpayers, that is going to be a higher tax rate than the capital gains rate as most taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized. That gives them a financial incentive to hold investments for at least a year, after which the tax on any profit will likely be lower.

Day traders and others taking advantage of the ease and speed of trading online need to be aware that any profits they make from buying and selling assets held less than a year are not just taxed—they are taxed at a higher rate than assets that are held long-term.

Taxable capital gains for the year can be reduced by the total capital losses incurred in that year. In other words, your tax is due on the net capital gain. There is a $3,000 maximum per year on reported net losses, but leftover losses can be carried forward to the following tax years.

If you have a high income, you may be subject to another federal levy, the net investment income tax. This tax imposes an additional 3.8% of taxation on your investment income, including your capital gains, if your modified adjusted gross income or MAGI (not your taxable income) exceeds the following (2022):

  • $200,000 if you’re single or a head of household

  • $250,000 if married filing jointly or a surviving spouse

  • $125,000 if married filing separately


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This material represents an opinionated assessment of the market environment based on assumptions at a specific time and is always subject to change. It is not intended to act as a forecast of future events or a guarantee of any future results. The material is insufficient to be uniquely relied upon as research or investment advice. The user of this information assumes the entire risk of any use made of the information provided in this or any other Anglia Advisors post or other communication.
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Clients of Anglia Advisors may maintain positions in securities and asset classes mentioned in this post. 

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