Investors As Circus Performers

Investors As Circus Performers

Investors don’t need to stay informed in an effort to better their ability to play the role of “fortune teller”, but rather to help them remain balanced and moving forward just like a “high-wire performer.” We share info in these messages, including this week’s data, to prepare you for the range of possibilities that exist and counter-balance prevailing sentiment – this week that means sharing some positive developments being ignored by the overly pessimistic.

Five Things You Should Know

1. Equity Markets – were higher this week with U.S. stocks (S&P 500) up 1.15% while international stocks (EAFE) rose 1.66%.
2. Fixed Income Markets – were higher with investment grade bonds (AGG) up 1.50% while high yield bonds (JNK) rose 1.23%.
3. Fed Suggests Slower Pace – Markets rallied this week on comments from Fed Chair Powell signaling the central bank may begin slowing the pace of interest-rate increases in December while also noting borrowing costs will need to stay elevated in order to continue combating inflation. The news also saw the US dollar reach a 3-month low.
4. China Rethinks Covid Policy – China continued to walk back their “Zero-Covid” policy on the heels of record new cases by allowing some virus-infected people to isolate at home. The government has also announced increased efforts to bolster vaccinations amongst senior citizens.
5. Key Insight – [VIDEO & ARTICLE] Investors don’t need to stay informed in an effort to better their ability to play the role of “fortune teller”, but rather to help them remain balanced and moving forward just like a “high-wire performer.” We share info in these messages, including this week’s data, to prepare you for the range of possibilities that exist and counter-balance prevailing sentiment – this week that means sharing some positive developments being ignored by the overly pessimistic.

Insights for Investors

The Fundamental View

It’s not just your feelings, it’s an actual fact that 2022 has been a historically tough year for equity investors. Not only did we experience the first prolonged bear market since the Great Financial Crisis of 2008, but volatility and “down days” hit levels rarely seen before (see charts below).

As we prepare to head into the new year, and headlines concerning recessions grow, what should equity investors be expecting?

While the inversion of the yield curve coupled with eight straight months of contraction from leading economic indicators as summarized by the Conference Board strongly suggest an actual recession will occur in 2023, there are still reasons to believe it may not be as deep as many currently fear.

Most notably, the recent improvement in supply chain pressures (a key driver of recent inflation unlike in the 1970’s) should cause enough improvement in the inflation data to allow the Fed to abate their rate hikes before they reach a level that is destructive to the demand side of the economy and/or creates a large spike in unemployment.

Key to sustained improvement in supply chains is some relaxation in China’s zero-covid policy which seemingly gained traction this week. Chinese stocks rallied on the National Health Commission Vice Premier Sun Chunlan statements that “new tasks” to fight the pandemic due to a “less pathogenic” Omicron variant and included that Beijing would allow for home isolation for some cases instead of central quarantine measures.

This reality along with the fact that the private sector and individuals are on a much stronger financial footing than they were in 2008 argues for a milder recession in 2023 than what is being popularly forecasted (see accompanying chart).

The market continued to bounce back and forth this week on interpretations of various inflation data points. Earlier this week, markets received some good news when the Fed’s preferred measure of inflation, Core Personal Consumption came in +0.2% vs. expectations of +0.3% and last month’s reading of +0.5%. Furthermore, the growth rate in private sector salaries and wages decelerated 130 basis points (see chart below). While the strength of Friday’s jobs report (263k jobs gained vs. 200k expected) spooked markets, a broader look at all of the data suggests in our view that inflation is in fact peaking (see PCE and wage growth above), while labor supply remains tight enough to discourage employers from engaging in the levels of layoffs seen in prior recessions.

This stability in the labor market in turn should create a floor for the economy that helps prevent the type of severe recession caused by the destruction of the demand side of the economy due to high levels of unemployment.

The Quantitative & Technical View

While fundamentals often help explain what’s more probable to occur six to eighteen months out, many nearer term moves are best viewed from a quantitative or technical viewpoint.

As to the former, the key metric we like to look at in investor sentiment, a key contrarian signal for patient investors. The good news here is that investor sentiment remains weak, with only 24.5% of investors reported as bullish in the latest AAII Survey, a week over week decline form 28.9% despite recent market strength. The Bull vs. Bear spread has now extended its streak of negative (e.g., bearish) reading to a record 35 weeks (see accompanying chart from Bespoke).

Two other quantitative, and contrarian, indicators are reflected by:

1. The number of people betting against the stock market as indicated by the put to call ratio is reflected in this great chart courtesy of Michael McDonald which shows that similar extremes have coincided with multiple market bottoms.

2. The number of people still sitting in cash, which currently resides at levels seen at other market lows.

The technical picture still raises some immediate concerns. As noted from Wall Street Breakfast, “Wednesday's move resulted in the Dow Jones Industrial Average rising more than 20% since Sept. 30 - its lowest point of the year - meaning it is now officially in bull market territory. Elsewhere, the benchmark S&P 500 is up 17% from its YTD low, and while tech-heavy Nasdaq still has some ways to go, it has rebounded nearly 14%.”

The technical set up was summarized by Bespoke who stated, “After August’s miserable failed attempt to break above the 200-day moving average and the double-digit percentage gain that followed, bulls had been attempting to take out that level again in the last couple of weeks. Just when it looked as though the latest attempt was running out of steam, yesterday’s Fed-fueled rally finally got the job done. Whether or not it holds will be the real test. Before bulls could even start to celebrate the breakout of the 200-DMA, another resistance level looms above. From the high in early January, you can draw a perfectly straight line connecting the dots of the subsequent lower highs we have seen this year, and yesterday’s close is the fourth point in that line.”

As always, please remember we share the above information, not because we believe any given data or market take is determinative or predictive (see our Weekly Video for a discussion of fortune tellers vs. high wire performers), but rather to counter the still overwhelmingly negative sentiment to keep us all balanced in our perspective and positioning (and thus safely able to navigate that high wire to the other side).


Have a wonderful weekend,

Tim and the team at TEN Capital

Data, Just the Data

Data points this week included:

• U.S. Jobless Claims – fell 16K down to 225K claimants for the week ending November 26^th, which was below expectations of 235K claimants. The four-week moving average has risen to 228.7K – an increase of 1.75K compared to last weeks.
• U.S. Jobs Added – the U.S. economy added 263K jobs in the month of November which blew forecasts of 200K out of the water. This is although the lowest gain since April of 2021, but it is a sign the labor market is still healthy. Gains could be seen in leisure and hospitality up 88K, healthcare up 45K, and government up 42K. Declines could be seen in retail down (30K), merchandise stores down (32K) and transportation and warehousing down (15K). Monthly job growth YoY has averaged 392K for 2022.
• U.S. GDP – the second estimate has shown the economy growing at 2.9% annualized for Q3 of 2022, which beat forecasts of 2.7% and is up 0.3% from the first estimate. Net trade rose, helping to bump the estimate, as did imports as they fell to (7.3%) and exports slightly bumped up to 15.3%. Consumer spending climbed more than anticipated to 1.7% with growth in healthcare spending leading the way. Nonresidential investment bumped up 5.1% thanks to equipment and intellectual property.
• U.S. Personal Income/Outlays – increased by 0.7% MoM in October, which is up 0.3% from the month previous and above forecasts of a 0.4% rise. This is the highest reading since October of last year and rises in compensation (private wages & salaries) and social benefits were the biggest drivers. Personal Consumption Expenditure’s rose 0.3% MoM which was in line with expectations and core PCE bumped up 0.2%. On a YoY basis, PCE ticked down to 6% and core also dipped slightly to 5%.
• U.S. Manufacturing Index – the ISM PMI declined for the third consecutive month to 49 in the month of November and is down from 50.2. This marks the first contraction (below 50) in factory activity since summer 2020. New orders dipped from 49.2 to 47.2 and backlog of orders also dipped from 45.3 to 40. Employment also fell as companies have continued hiring freezes and layoffs. Production and inventory also showed declines, but both above the contraction mark.
• U.S. Consumer Confidence – the Univ. of Michigan consumer sentiment index came in higher than expectations at 56.8. The current conditions subindex came in at 58.8 and the expectations subindex came in at 55.6. The year ahead inflation expectations moved down from 5.1% to 4.9% the five-year outlook moved down to 3%.