Investor frustration and confusion at the fact that nothing’s sticking is growing. Authentic-looking rallies like what we saw the previous week end up having no value as they disappear in a puff of red smoke as happened last week. Back to square one as if the rally never happened. This low-traction environment seems (as suggested in my Under The Hood section last week) to be pivoting around the 3800 level for the SPX index (S&P 500).
The index is the at the same level now as it was in the second week of June having been 300 points higher and 300 points lower in the interim. We see inflows into stocks one week, then outflows a few days later. All that stress and those dashed hopes and nothing’s really changed. The bottom has not been found.
However, if you zoom out, you can survey the wreckage properly. The S&P 500 dropped 20.6%, for its worst first-half-year period since the one during which the Jackson Five, Simon & Garfunkel and the Beatles all had number one hits in 1970. The index fell 16% in the second quarter alone. Take a look at an amazing graphic representation of this here.
The declines of 29.5% from the Nasdaq Composite and 23.9% from the Russell 2000 (Small Cap stocks) are both indexes' worst first halves ever recorded. The “Agg” broad index of fixed-income securities (bonds), fell 10.7% since the start of 2022. That's also its worst first-half ever on record.
If you are planning to host a quiz night with your friends and family on the theme of The First Half of 2022, you may find the following useful:
Best-performing sector – Energy +37.7%
Worst-performing sector – Consumer Discretionary -11.5%
Best-performing S&P 500 stock – Occidental Petroleum +103.1%
Worst-performing S&P 500 stock – Netflix -71.0%
Best-performing stock in the Dow Jones Industrial Average – Chevron +23.4%
Worst-performing stock in the Dow Jones Industrial Average – Disney -39.1%
Best-performing market worldwide – Chile +4.9% (in USD)
Worst-performing market worldwide – Russia -41.8% (in USD)
Best-performing commodity – Kerosene (jet fuel) +91.3%
Worst-performing commodity – Hot-Rolled Coil Steel -34.2%
Bloomberg Barclays U.S. Aggregate Bond Index -10.7%
10-Year Treasury Yield +1.477 percentage points
CBOE Volatility Index (VIX) +73.5%
Gold -1.3%
WTI Oil +40.6%
U.S. Dollar +9.2%
Bitcoin -60.3%
One possible silver lining is that on the previous five occasions that the S&P 500 has fallen at least 15% the first six months of the year (1932, 1939, 1940, 1962 and 1970), it has risen an average of 24% in the second half. Please take this stat with six large bags of salt and do not make any investment decisions based on it. In fact, you know what? Just forget I even mentioned it.
As is customary at this time of year, trading volume is slowing fast going into the summer with about 4 billion shares changing hands on the New York Stock Exchange on Friday versus typical daily volume of closer to 5 billion. The problem is that thinner volume tends to magnify market moves as it takes less firepower to push a stock price around.
Last week’s price reversal started when the University of Michigan study revised its inflation expectations lower from 3.3% to 3.1% for the next five to 10 years, but that’s still solidly higher than the Fed’s old 2% target. Also, consumers’ short-term outlook for the U.S. economy dropped sharply to its lowest point in nearly a decade. Consumer confidence also fell for a second consecutive month as Americans continue to assess the impact of high prices and rising rates.
The big release, though, was the Fed’s favorite data point, on which it bases most of its decisions, the Personal Consumption Expenditures Index for the month of May, showing prices rose 0.6% last month, accelerating from a 0.2% increase in April. The index was up 6.3% from last year, the same year-over-year rate as the month before, still near a 40-year high. The latest readings offered little indication of easing price pressures, with inflation continuing to run hot at a highly elevated rate.
Meanwhile, consumer spending, which accounts for more than two-thirds of economic activity in the US and has held up tremendously well recently, slowed significantly in May, decelerating to a 0.2% growth rate in May from 0.6% in April.
This data combo indicates that consumer spending is slowing much more quickly than inflation is peaking, inevitably raising the volume of those crying recession. The stock market shook its head gloomily and basically wiped out most of the previous week’s gains.
On the plus side, China last week announced it was reducing its quarantine rules for those entering the country. cutting back from two-to-three weeks to ten days. A brief bounce in stocks ensued, but it was a market grasping at straws and it soon fell back again.
To reiterate, my advice to clients is not really changing. Longer term portfolios (time horizons of at least twelve years or more) should be, at a minimum, maintaining their levels of recurring systematic purchases of index exchange traded funds (ETFs) or, even better, selected, sensible factor ETFs (see FINANCIAL TERM OF THE WEEK below). If cash flow allows, the amount being purchased should be stepped up to ensure that you are buying in at a lower weighted average price.
For even longer time horizons (like, for example, retirement $$ for people aged 40 or younger), it’s my opinion that you should be backing up the truck right now, but you need to be buying the right kind of ETFs and avoiding others as well as not individual stock-picking. Your future self will be glad you did.
Happy to discuss further with clients.
Other News: Sorry, yet another crypto edition
The Walking Dead .. Bitcoin has now plunged about 40% in just the last four weeks diving below $19,000, it just experienced its worst month ever, its worst quarter since 2011 and it’s now down over 70% from its late 2021 high. Almost a trillion dollars (that’s trillion with a “t”, that’s $1,000,000,000,000) has been wiped off its value.
The situation was not helped last week by the Securities and Exchange Commission (SEC) rejecting two more applications for a spot Bitcoin ETF and the arrival on the market of an inverse Bitcoin futures ETF which makes it easy for traders to bet on the price of Bitcoin futures going lower.
And that’s just Bitcoin. Ethereum and all the shitcoins have, for the most part, been crushed even harder, some into terminal oblivion. And right now NFT may as well stand for Nightmare, Fear, Trauma.
The vision of a de-centralized, utopian financial heaven has been replaced by the reality of very old-school Wall Street-like greed, depravity and corruption and Bernie Madoff-style deceptions and dirty schemes all throughout the space. Rebuilding trust beyond the bubble of Bro-World is going to take a long time.
And now the last crypto shoe seems to be dropping. After its initial collapse, reported in my weekly review two weeks ago, crypto hedge fund Three Arrows Capital (3AC) entered complete liquidation last week, following a court order issued in the British Virgin Islands after creditors sued the hedge fund for its inability to repay debts amid the broad and deep decline in cryptocurrency markets and ridiculously excessive leverage and margin used by the fund (seriously, if you really believe the price of an asset is going to move from $50,000 to $500,000 and you’re right, you’ll get very rich by just buying in cash without margin or risking 10x, 50x, 100x leverage - which could kill you if your prediction fails and the price falls .. exhibit A).
3AC had pursued an aggressive trading strategy that included placing highly leveraged bets on various cryptocurrencies. The firm also had heavy exposure to the “stable”-coin (serious mis-nomer) Terra USD along with its sister coin, Luna, which fell to pieces, collapsing in value last month, incinerating millions of dollars of client money overnight.
3AC’s co-founders, Zhu Su and Kyle Davies, like Terra’s infamous founder Do Kwon, are among the more obnoxious crypto bros out there and in the weeks leading up to the liquidation, executives sought to placate rumors about a potential liquidation through pumping out misinformation, endlessly tweeting that there was nothing to see here and everything was just peachy.
Along with the seemingly bottomless price disintegration, the failure of 3AC has led to growing concerns of a domino effect whereby other crypto or crypto-adjacent funds and firms and structures could also go under. Many of these have faced liquidity, funding and margin-call issues in recent weeks and months, notably crypto lending firm Celsius (which used to offer as much as 15% to 18% p.a. for deposits of certain “stable”coins) and crypto exchange CoinFlex both of whom recently indefinitely suspended their customers’ ability to access or withdraw their money.
Is anyone ever going to take the razor blade away from the baby by means of strict regulation of the crypto space? We can only hope. The former head of SEC’s Office of Internet Enforcement said of crypto-world; “People call it the Wild West. It’s not the Wild West. It’s Walking Dead-like anarchy with no law and order.”
Full disclosure: I personally own a small amount of Bitcoin and Ethereum and have no intention of selling any of it on the (admittedly declining) off-chance that all the optimism about crypto is maybe one day justified - but if it does all go to zero, my overall financial situation is not going to be meaningfully impacted at all.
I am frequently comfortable recommending a similarly-sized crypto holding (i.e., an amount that, if entirely wiped out, would have virtually no real overall financial consequences to the owner) to certain clients as a part of a goal of increased diversification that is theoretically not generally highly-correlated to the overall stock market - in most cases, a maximum of about 1-2% of total investable assets.
I can often facilitate client ownership of Bitcoin or Ethereum using the Flourish platform which is exclusively available to clients of certain financial advisors such as Anglia Advisors.
Under The Hood:
Surveys like those referenced earlier in this report only measure what investors think. The Lowry’s measures of Supply and Demand evaluate how investors act. The spread between Buying Power and Selling Pressure did not plunge to new lows as the S&P 500 set its year-to-date low on June 16. That is not a good divergence for those looking to try and find this market’s bottom.
History tells us that coming out of the Great Financial Crisis, Selling Pressure started to ease in December 2008, while the S&P 500 eventually recorded its final low in late March 2009. Conditions were not ripe for a further three months after Selling Pressure began to ease because that is only Phase One. Phase Two is such an oversold condition following an orgy of indiscriminate selling that finally pushes prices down to the point where equally powerful and highly motivated buyers step in and the markets rips higher, which is Phase Three.
Also, when you look at the readings that have historically been reached in previous bear markets before sustainable rallies finally take off in things like the Percent of Stocks More Than 30% Below Their One Year Highs, Percent of Stocks At New Lows and the relative spread between Supply and Demand numbers - none of them are even close to where they need to be at the moment.
Unfortunately, based on historical analysis of the bottoming process, evidence that we are have reached a major and sustainable market bottom remains incomplete.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
The upcoming week’s calendar ..
A quiet week ahead .. the stock market will be closed on Monday for Independence Day and it will then be a light week on the earnings calendar with only Costco and Levi Strauss releasing anything of consequence.
The economic data highlight will be the June jobs report on Friday. On average, economists are expecting a gain of 250,000 non-farm payrolls, after an increase of 390,000 in May. The unemployment rate is expected to remain at 3.6%.
Other data out next week will include the Purchasing Managers’ Index and the release of the minutes from the Fed’s most recent meeting last month.
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US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 23% (up from 18% the previous week)
→Neutral: 30% (down from 22% the previous week)
↓Bearish: 47% (down from 60% the previous week)
Net Bull/Bear spread .. ↓Bearish by 24 (Bearish by 42 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Bull-Bear spread: Bullish by 8
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
- Last week’s best performing US sector: Utilities (two biggest holdings: NextEra Energy, Duke Energy) - up 2.7%
- Last week’s worst performing US sector: Consumer Discretionary (two biggest holdings: Amazon, Tesla) - down 4.3%
- The S&P 500 fell by quite a lot less than the NASDAQ-100
- US Markets, International Developed Markets and Emerging Markets all did equally poorly
- Large Cap somewhat lagged Mid or Small
- Growth strongly under-performed Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 156 and fell by 17 points last week while that of US Market Selling Pressure is at 212 and rose by 14 points over the course of the week
- SPY, the S&P 500 ETF is still below both its 50-day moving average and its 90-day and also remains a long way below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 44**. SPY ended the week 20.2% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is still below both its 50-day moving average and its 90-day and also remains a long way below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 44**. QQQ ended the week 30.2% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week fractionally lower at 26.7 and is below its 50-day moving average and just below its 90-day. It continues to be above its long term trend line.
ARTICLE OF THE WEEK:
This week .. A guide to some of the employers who are to be lauded for making a stand in the face of some of the dark news coming out of Washington DC.
FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
Trackers and exchange-traded funds (ETFs) that pursue a simple, passive strategy of following a specified market or index have become extremely popular in recent years, as it has become common knowledge to most people that classic stock picking does not work although, bizarrely, some people out there still continue to have faith that they have some kind of mystical predictive ability to successfully select individual stocks.
A pure tracker that entails “buying a market,” such as the S&P 500 or the FTSE in the U.K., has its disadvantages. Although highly transparent, investors are completely exposed to the market in question and all its vicissitudes. It is not surprising, therefore, that hybrid models have emerged that are still tracker ETFs but are deliberately biased in one or more respects. These are often referred to as “factor ETFs.”
The concept behind a factor ETF is that by shifting away from “plain vanilla” trackers, one can improve the rate of return and/or risk level without getting into expensive and time-consuming stock picking. This shift is referred to as “bias” or “tilt.” In other words, these products are not pure trackers; they deviate to some degree from simply going up and down with the specified market.
The following are examples of very “pure” factor ETFs:
iShares MSCI USA Size Factor ETF (SIZE)
iShares MSCI USA Momentum Factor ETF (MTUM)
iShares MSCI USA Value Factor ETF (VLUE)
Each iShares ETF has a particular tilt, one biased toward small firms, another toward firms whose stock value is accelerating in price or gaining momentum, and a third toward stocks that may be undervalued by the market.
The size factor ETF from iShares focuses on U.S. large- and mid-capitalization stocks "with relatively smaller market capitalization" with the idea that smaller firms tend to be overlooked. The momentum factor ETF invests in stocks with accelerating price and volume, while the value factor ETF weights securities according to four accounting variables and compares these to the parent index.
These three approaches “tilt” the fund away from exposure to your chosen index. These forms of bias all make financial sense, and if properly tuned, should provide a good quasi-tracker, but one that can outperform a pure buying-the-market vehicle.
There are other factor ETFs that focus on factors like free cash flow, low volatility, high beta, dividend yield or even aggregated multi-factors.
These type of ETFs are fairly new, so there is not much of a track record. However, the logic is sound enough that a prudent investment could pay off. Make sure that you understand exactly how the products work. The more an ETF deviates from the pure index (benchmark risk), the more appropriate it may become for sophisticated investors or those with portfolios created and directly managed by a professional, such as Anglia Advisors.
ETFs and trackers are here to stay, given that it is pretty much accepted that paying someone to simply “beat an index" is likely to be counterproductive. Pure trackers have their disadvantages, however, as there is no protection from market movements. Factor ETFs offer some compromise with a bit of "tilt" away from an index. If you are more experienced or adventurous, factor ETFs may make sense as a form of smart diversification and a potential means of enriching your portfolio.
Note: Anglia Advisors makes frequent use of multiple selected factor ETFs in some of its managed and suggested portfolios.
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This material represents an opinionated assessment of the market environment based on assumptions at a specific point in time and is always subject to change. No warranty of its accuracy is given. It is not intended to act as a forecast of future events, nor does it constitute any kind of a guarantee of any future results, events or outcomes.
The material contained herein is at no time ever intended to constitute tax, legal or medical advice. It is also wholly insufficient to be exclusively relied upon as research or investment advice. The user assumes the entire risk of any actions taken based on the information provided in this or any other Anglia Advisors post or other communication.
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