How to L.I.V.E. Through the Uncertainty of Markets 

Five Things You Should Know

1. Equity Markets – were up this week with U.S. stocks (S&P 500) up 1.49% and international stocks (EAFE) up 2.93%. 
2. Fixed Income Markets – were also up this week with investment grade bonds (AGG) up 0.23% and high yield bonds (JNK) up 0.47%. 
3. U.S. Inflation Data – The Consumer Price Index (CPI) rose 0.5% in January and 3% year-over-year for the highest rate of increase in over a year. Core CPI also now sits at +3.3% year-over-year, reconfirming the Federal Reserve’s current message that they are in no rush to continue with rate cuts amid growing economic uncertainty. 
4. U.K. GDP – Britain saw their economy unexpectedly rise by 0.1% in Q4 despite consensus expectations of contraction, with the growth largely contributed to the services sector while business investment remained weak. For calendar year 2024 the region saw GDP rise by 0.9% 
5. Key Insight – [VIDEO & ARTICLE] It isn’t prediction, but preparation that is not only the more possible but more productive. What is the framework to bring that into reality for each of us? This week we discuss, along with a little data for those that still enjoy that as well. 

Insights for Investors

By Tim Mitrovich

Building a Portfolio You Can L.I.V.E. With 

Performance comes in many forms, each with their own tradeoff in terms of what you can achieve with respect to one of the others. Similarly while making money over time is the goal of almost any investor, only addressing that goal alone will likely lead to stumbling blocks from neglecting other factors that can short-circuit the time often required for people to see the results they are hoping for. 

How then does one properly allocate to enable themselves to have time necessary for true success? 

Once again, our L.I.V.E. framework is critical. For those of you this is new for, the acronym stands for the four components/trade-offs any investor must decide balance when building out a comprehensive portfolio – Liquidity, Income, Volatility, and Expected Return. 

Why Liquidity? This is arguably the first item any investor needs to address. It speaks to the likely/probable amount of money that one needs to keep on hand to address either expected and/or unexpected “needs”. Especially in light of the fact that, as discussed above, markets are prone to periods of volatility and such volatility may arise at an inopportune time when an investor has need of cash. 

Why Income? Once one’s emergency funds are set, they must make sure they have a proper income stream for their “lifestyle” that is independent of their expected returns, or even historical averages. The reason again is that one does not want to have to be selling off assets in the midst of a period of volatility and thus put into risk the longevity of their portfolio (for more google “Sequence of Returns” risk). Fortunately, portfolios can be built to generate significant cash flow, independent of capital appreciation/depreciation, to render this risk moot. 

Why Volatility? Volatility must be addressed because a) it’s inevitable (see above chart) and b) every investor has a limit to how much they can likely endure “emotionally” before pulling the plug on their investments and thus missing out on their long-term potential. A plan and portfolio that works mathematically to meet one’s goals, without being properly designed to address their “volatility tolerance” is a bad plan. And while no plan can avoid volatility all together, they can certainly be built to mitigate it and make it bearable for most investors. 

Why Expected Returns? Do “total returns” over time matter? Absolutely. Inflation and its erosive impacts are real, and so is the need for most to experience solid growth to reach many of their financial goals. So, while one could keep their money very a) liquid in a money market that generates b) a little income and has little to no volatility, thus seemingly addressing the first three aspects of L.I.V.E. they still run the high likelihood of failing to achieve some of their greater goals that require greater wealth generation that overly conservative investments can provide. 

Helping our clients address the above in all respects, and in a way that makes sense is what we believe differentiates the team and process at TEN to help clients have confidence in their plan and their future. As always, if you would like to discuss any of the above or if someone you care about has such a need we are always here. 

Checking in on the Market 

A. Economic Data 

As always, data is a mixed bag. I find it more important to stay on top of it to avoid surprises, than in an effort to project or predict markets.  

In general, inflationary concerns continue and the recent CPI data didn’t assuage those concerns. From the team at TrendMacro this week came “Ugly and complicated CPI print this morning — we had been expecting a beat, and we got a big miss. We can’t blame the annual changes in basket weights — they were trivial. We’ve been gradually giving up on our monetarist model that predicts CPI based on changes in the money supply, judging that its signal-to-noise ratio has been degrading as inflation has normalized. But its prediction for January CPI was literally perfect, and looking ahead, it’s predicting that CPI will keep gently rising over the coming year. Markets are now saying there isn’t certainty of a Fed rate cut until December.” 

However, its not all bad. The team at RenMac noted some optimism after digging into the individual aspects of the recent CPI (Consumer) and PPI (Producer) data, stating “Core CPI likely overstates inflation pressures. Indeed, today’s producer price index was welcome for core PCE. In January, we likely see weaker growth in medical care services, airfares, auto insurance and portfolio management; in other words, non-housing services will run more benign than they did in yesterday’s core CPI figures. Taking the details of core CPI and PPI, I estimate that core PCE will rise 0.26 percent month-over-month in January. That would bring the year-over-year rate to 2.6 percent, not far from the Fed’s current year-end estimate of 2.5 percent.” 

One of the key reasons this data is of course important to the market is for those attempting to project the likely path of the Fed’s interest rate policy. 

The team at RenMac commented on this stating “The Fed Fund futures curve is as flat as anytime in the last 2 years with no meaningful differential between spot and 3yr forward rates. That’s unrealistic, but what way it breaks remains questionable. Fed funds to 2-year yields are close to parity, suggesting the market rate is in line with set policy rates, and maybe more importantly, buying into current forward guidance from Fed Chair Powell” (see accompanying chart). 

Again, on the positive front came the most recent data on US manufacturing showing some signs of life after what’s been a rough period. As reported by TrendMacro, “US manufacturing PMI rises above 50 for the first time since October 2022 — and there was no recession. Non-manufacturing PMI falls, but stays well above 50. Both sides of the economy are finally in synch.” 

Lastly, but likely most importantly is the latest on the corporate earnings front.  

The team at First Trust summarized the current state of corporate earnings stating, “With fourth quarter earnings season well underway, we wanted to provide an update regarding estimated 2024 and 2025 earnings and revenue growth rates for the companies that comprise the S&P 500 Index (“Index”). On January 28, 2025, the Index closed at 6,067.70, representing an increase of 27.21% on a price-only basis from when it closed at 4,769.83 on December 29, 2023, according to data from Bloomberg. For comparison, from 1928-2024 (97 years) the Index posted an average annual total return of 9.71%. We have maintained that increased revenues could boost earnings and provide the catalyst that drives equity returns higher going forward. We believe that the Index’s continued price improvement is reflective, in part, of that scenario playing out” (see accompanying graphic). 

Echoing similar positivity our colleague Stephanie Link summarized the current earnings season and state of corporate health stating, “As of February 7th, 62% of the S&P 500 have reported earnings. 77% of companies that have reported have beaten earnings estimates, and 63% have beaten revenue estimates. Overall, the current y/y blended earnings growth rate is 16.4% which would be the highest growth rate since Q4 2021 if it holds through the end of the reporting season.” 

The one potential concern to keep an eye on is the health of the US consumer, especially given its outsized role in the US Economy, and on that front, there are some signs of “strain” as stated by RenaissanceMacro. 

They noted the following: 

• “The Philadelphia Fed study revealed that credit card holders making only minimum payments reached a 12-year high of 10.75% in Q3 2024, marking a consistent increase since 2021. Credit card delinquencies of 30+ days rose to 3.52%, more than doubling from the pandemic low of 1.57% in Q2 2021.” 

• “Vehicle financing also shows concerning trends, with repossession assignments reaching 0.75% of outstanding vehicle loans in December 2022, representing a 22.5% increase from December 2019 and exceeding pre-pandemic levels. Consumer spending, though still positive, shows signs of slowing. Retail sales growth decreased to 0.4% in December 2024 from 0.8% in November, with annual retail sales growth declining to 4% from the previous year’s 5%. This trend is particularly significant as consumers drive approximately two-thirds of U.S. economic activity.” 

B. Technical Outlook 

Markets, especially in the age of quantitative trading, are also influenced by market technicals in addition to the fundamentals above. Brogan Research had this to say about the current technical conditions, “in a Bullish stocks market is a majority of High Beta stocks go up faster than the stock market.  Conversely, we typically see a majority of High Beta stocks go down faster than the market when the market goes down.  What you can see from the chart below, the % of stocks in the S&P500 High Beta Index that are in a positive outperformance trend, and we want to see the breath expanding and rising with the market index and when it is not, it is Diverging.  This Divergent pattern is very important to identify potential future direction of the overall stock market in both a positive and negative direction.  Currently, we are recording significant Negative Divergence on our Relative Performance Breadth which is a MAJOR Red Flag and danger signal for the future direction of the overall stock market.” 

More optimistically from RenaissanceMacro came this outlook “10-day composite put/call ratios have dropped into the complacent zone in our work, below .80. Tops are historically harder to pin-point than bottoms, and we don’t see the same level of complacency in other indicators. Some futures positioning is bearish, with speculators long and commercials short, but the survey measures, including our favorite (Investors Intelligence) are generally neutral. Given the bifurcated status of industries, groups and sectors, mixed sentiment readings shouldn’t come as a big surprise.” 

In Closing 

Data matters, staying informed matters, but by no means are either a path to successfully, and repeatedly, predicting markets and building wealth. 

The good news is, predicting markets isn’t necessary for success. However, preparing for ever-changing markets is and that’s where applying the above L.I.V.E. methodology to one’s situation and goals becomes critical. 

Our hope is that you find the above framework helpful, and of course we are always happy to walk through each aspect and how they may apply to your unique situation anytime. 

Have a wonderful weekend, 

Tim and the team at TEN Capital 

Data, Just the Data

• U.S. Jobless Claims – initial claims fell by 7,000 last week to 213,000 and below market expectations of 215,000. Continuing claims also saw a noticeable drop of 36,000 for a total of 1,850,000.  

• U.S. Retail Sales – fell 0.9% month-over-month in January despite expectations of just a 0.1% drop. This marks the biggest monthly decline since March of 2023 and snaps a 4 month streak of sales expansion.  

• U.S. Industrial Production – rose by 0.5% in January following an upwardly revised +1% in December. Year-over-year production now sits at +2%, the biggest rise since October 2022.  

• Euroarea Industrial Production – fell by 1.1% in December and fairing much worse than expectations of a 0.6% decline. Year-over-year production now sits at -2% for the region.