Year: 2022

A Good Time to Pick Stocks

It was a great year to be a stock picker.

If you picked a handful of random stocks each year on January 1st, weighted them equally in a portfolio, and then remained invested in those stocks until the end of the year, you’d find yourself underperforming index returns most of the time. It’s one of the best-known secrets of investing: a small group of stocks have generated most of the returns for US investors over the last century or more. That’s part of what’s made index investing so popular. Buying all the stocks ensures you’ll own the few on the fat tail of the distribution curve, and history has shown those great returns are enough to offset the detriment of also owning the laggards.

2022 has been an exception to the rule. More individual stocks are outperforming the index than in any year since 2009.

It’s a sharp divergence from the last few years – most notably 2020 – where calendar year returns were especially dominated by a handful of names. You’ve probably heard of some of those big winners from 2017 -2021. Apple. Amazon. Microsoft. Alphabet. The biggest stocks (which of course are the largest components in market cap-weighted indexes like the S&P 500) dragged indexes higher, while many non-growth stocks languished. In 2022 it’s been the opposite. Value and safety sectors like Energy, Industrials, Health Care and Consumer Staples have led the way. Mega cap tech, on the other hand, has been punished. That’s helped 58% of S&P 500 stocks to post better returns year-to-date than the index’s 19% decline.

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The Weekly Wrap: December 27, 2022

Week in Review

Stock market returns were mixed entering the long holiday weekend. The Dow Jones Industrial Average rose 0.86% on the week, while the S&P 500 index fell modestly, and the Nasdaq Composite dropped 1.9%. The 10-year rate closed near 3.75%, its highest level in a month. A falling US Dollar index provided a tailwind to commodities – gold prices climbed 0.3%, while crude oil jumped more than 7%. Oil prices are still lower for the month of December. Bitcoin continued to struggle, dropping another 3%.

Relatively Speaking

Risk-off sectors of the market outperformed over the last month as stock prices fell. Utilities and Health Care were the lone positive sectors over the period. Energy stocks declined almost 9%, reversing some of their year-to-date gains, while Discretionary, Technology, and Communications all continued to lag.

For the year, Energy is only sector in the green, up more than 50%. It’s outperformed the broader index by 91% since last December. Technology and tech-like groups have seen the most damage, while sectors that are less exposed to economic activity, like Consumer Staples and Health Care, have outperformed.

What’s Ahead

It’s the final trading week of the year, and it’ll be shortened one. Markets are closed Monday in the US and many countries around the world in observance of the Christmas holiday. National home price indexes are updated on Tuesday morning, and pending home sales are released on Wednesday. Business survey results from the Dallas, Richmond, and Chicago Federal Reserve districts are published on Tuesday, Wednesday, and Friday, respectively. The US Treasury will also auction 2-year, 5-year, and 7-year notes during the week. Then it’s on to 2023.

The 8 Charts That Defined 2022

Another year is nearly gone, and it’s been one for the books. Let’s take look at what made 2022 what it was.

Inflation

Inflation. How could a discussion of the last 12 months start anywhere else? Prices spiraled out of control in the aftermath of the unprecedented fiscal and monetary stimulus that accompanied the pandemic. At first, the surge in prices was led by goods. With spending on services crimped by lockdowns, people instead spent on things they could touch and hold. At the same time, supply lines for those goods were disrupted.

The economists were right, in part. Those price spikes were transitory. It just took much longer than they’d initially expected for the price pressures to subside. The prices for core goods and energy appear to be stabilizing.

We can’t say the same for the price of services, though. Inflation may have peaked, but the days of 2% per year seem far away.

The Fed

It’s the job of the Federal Reserve to maintain price stability in the United States. In March 2021, when the monetary authorities still believed in the merits of ‘transitory inflation’, the Fed forecasted interest would remain at the zero lower bound until at least 2024.

Continue reading “The 8 Charts That Defined 2022” →

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The Weekly Wrap: December 19, 2022

Week in Review

The stock market sold off last week as the Federal Reserve signaled further rate hikes despite Tuesday’s better than expected inflation reading. The S&P 500 dropped 2.1%, the Dow Jones Industrial Average fell 1.7%, and the Nasdaq Composite declined 2.7%. Interest rates fell slightly, and the 10-year Treasury yield remains below 3.5%. The US Dollar index erased early-week declines to close largely unchanged, and gold prices failed to move much either. Oil prices jumped 4.6%, partially offsetting the huge selloff from the prior week. Crude is down 1.2% on the year. Bitcoin dropped 2%.

After four consecutive interest rate hikes of 0.75%, the Federal Reserve slowed the pace of tightening by raising rates by only 0.50% at last week’s meeting. It’s the first sign of a dovish pivot since the Fed began applying the economic brakes in early 2022. They’re still far from loosening policy, though, according to Chairman Jerome Powell. At his post-meeting press conference, he noted the risks of letting inflation expectations become unanchored. He pointing to missteps during the 1970s, when premature rate cuts allowed price pressures to spin out of control.

Monitoring Macroeconomics

GDP rebounded in the third quarter of 2022 after two consecutive quarters of negative growth to start the year. That should help dispel fears of an ongoing recession, especially since one was never confirmed by the National Bureau of Economic Research.

Measures of inflation remain well above the Federal Reserve’s 2% target, but CPI has decelerated for 2 straight months, an encouraging sign. Unemployment remains historically low at 3.7%, and consumer spending, measured by retail sales, remains robust.

What’s Ahead

The economic calendar is packed full ahead of the long holiday weekend. We’ll get updates on the housing industry, with the NAHB housing market index on Monday, housing starts on Tuesday, existing home sales on Wednesday, and new home sales Friday. The Conference Board and the University of Michigan will report on consumer confidence Wednesday and Friday, respectively. The final read on 3Q GDP arrives on Thursday, followed by PCE prices, personal income and spending, and durable goods orders on Friday. Numerous Fed speakers can also be expected following the end of their quiet period.

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Mid-Month Market Update: December 2022

Technical Trends

Equity prices have been steady over the last month and continue to be led by the Dow Jones Industrial Average and its tilt towards value stocks. The Dow is down only 4% over the past year, while the growth-oriented Nasdaq Composite is down a whopping 27%. The S&P 500 remains in a technical downtrend, with a current price below a falling long-term moving average. However, even when the index was at its lows for the year, prices never fell beneath their pre-COVID highs.

The 10-year Treasury yield has fallen below 3.5% after touching a 15-year high of 4.3% in October. The decline follows a shift in Fed policy expectations over the coming months. The year has still been a disappointment for bond investors, with the Aggregate US Bond index tracking for its worst annual performance on record.

Continue reading “Mid-Month Market Update: December 2022” →

Energy Stocks Running Out of Gas

In a year that’s offered few places for investors to hide, Energy has been a bright spot. The growth-dominated Nasdaq is down nearly 30%, and bonds are on track for their worst year in at least 50 years. Meanwhile, the S&P 500 Energy sector hasn’t spent a single day in negative territory.

It seems that run of outperformance has come to an end. Crude oil dropped to its lowest level of the year last week, closing near $70 a barrel. That’s 45% below the March highs.

At $70, prices are still well above the average cost of production globally and far above the sub-$40 levels seen just two years ago. That hasn’t kept Energy stocks from falling, though. Energy dropped 8% last week, lagging all other sectors as the S&P 500 dropped more than 2%.

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The Weekly Wrap: December 12, 2022

Week in Review

Asset prices were back under pressure last week as the Nasdaq Composite led stocks lower, dropping 4%. The S&P 500 Index fell 3.4% to close 17.5% lower for the year, and the Dow Jones Industrial Average slipped 2.8%. It’s still the best performing of the major US indexes in 2022, down less than 8%. Crude oil saw a significant weekly decline, dropping 11.2% as the US Dollar and interest rates both rose. The Dollar is nearly 10% higher on the year. Gold was mostly unchanged, ending the week near $1800. Bitcoin prices managed to rise more than 1%, but the cryptocurrency is still down more than 60% for the year.

Crude oil fell to its lowest levels of the year as markets continue to weigh slowing global activity against the threat of further supply disruptions. Most economists forecast a US recession occurring sometime in the next twelve months, with the consensus expectation being a mild contraction beginning in 2H 2023. The outlook for Europe is worse, as they’re already reeling from the impacts of war in the eastern portion of the continent. Despite the slowdown, OPEC refrained from further production cuts at their most recent meeting, given potential shortages stemming from the European Union decision to cap prices on Russian oil exports.

Earnings Expectations and Valuation

This year’s market selloff has not been matched by a proportionate decline in earnings expectations. That’s driven the S&P 500’s forward price-to-earnings ratio from a historically elevated level of 23x to 17x, which more closely aligns with the average over the last 30 years.

Earnings growth for large cap US stocks is expected to end the year at 7%, thanks to double-digit revenue growth. That’s near the long-term average, but a notable deceleration from prior years. In 2023, the consensus expectation is for 6% earnings growth, but that estimate relies on a reversal of the margin pressures seen in 2022.

What’s Ahead

The Federal Reserve will decide whether and by how much to raise short-term interest rates on Wednesday, as they continue on their quest to curb inflation. They’ll get one last piece of critical data on Tuesday morning, when the Bureau of Labor Statistics publishes Consumer Prices for November. It would take a material surprise in the CPI report to shift markets away from their expectations for a 0.5% rate hike. NFIB Small Business Optimism is slated for Tuesday morning, and last month’s retail sales are reported on Thursday. On Friday, S&P Global releases preliminary results for their December Purchasing Managers Index survey.

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Is it Time to Buy Precious Metals Again?

Metals pushed to the front of the pack in November. Gold and Silver both had their best month since 2020, and Copper prices rose by more than 12%.

At the end of October, it looked as though Gold prices were stuck beneath the low end of their 2020-2021 range and headed back toward their COVID lows. The problem for precious metal bears, though, was that Gold’s decline hadn’t accelerated when those lows were initially broken. Even worse, Silver prices had failed to confirm the breakdown. In fact, while Gold was setting new lows, Silver was setting higher ones. Silver tends to lead while precious metals are rising and lag when metals fall, so it was unusual to see Gold falling while its counterpart was putting in what looked like a healthy base.

Silver looks even better today.

The 2019-2020 highs provided a perfect springboard to launch Silver back above those 2021 lows, and it wouldn’t be surprising to see it retest multi-year highs. For those of you keeping score, that would be 25% higher from here.

Gold is battling near-term resistance at its August highs, and it’s yet to convincingly exceed the 200-day moving average. Still, the chart is in better shape than it was a month ago, and if prices can hang above 1800 for a week or two, there’s no reason it couldn’t join Silver in a retest of the highs.

The fate of metals may rest in the hands of the US Dollar.

Dollar strength has been a headwind for equities and metals for much of the year, as it rose 20% from January through September. With markets increasingly anticipating a slowing in Federal Reserve tightening actions, though, the greenback is giving back some of its gains. On Thursday, the US Dollar Index closed below its 200-day moving average for the first time in well over a year.

Continue reading “Is it Time to Buy Precious Metals Again?” →

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