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COTW: SVB Fallout and the Fed’s Rate Hike Path

SVB

Last month, the Federal Reserve slowed the pace of rate hikes, increasing interest rates by 0.25%, following a 0.50% rate hike in December and three consecutive 0.75% hikes at the three prior meetings. In early March, following a series of strong economic data releases in February, expectations were for interest rates to reach a high of 5.44% in July this year, before dropping down to 5.31% at the end of 2023.

February 2023 Commentary: The Money Illusion

Retail Sales Feb

Retail sales rebounded in January, following two consecutive months of declines. However, the impact of ongoing elevated inflation on consumers’ purchasing power remains unclear, as inflation creates an illusion of strength that is not carried through to inflation-adjusted data.

COTW: Inflation and the S&P 500

COTW 03.01

January’s inflation print showed inflation increasing 0.5% month-over-month, to 6.4%. A monthly reading of 0.5% or higher is rare, as there have only been five occasions that inflation has increased by 0.5% or more month-over-month between the Global Financial Crisis in 2008 and 2020. While ongoing elevated levels of inflation are having a material impact on consumers and the prices for goods and services, it is also having an impact on the relative strength of U.S. companies.

COTW: Growth and Value Indices

Index Rebalancing

The S&P 500 Value and S&P 500 Growth indices are two style indices designed to provide investors with exposure to the market’s value and growth segments, with constituents in the indices taken from the S&P 500. Each year, these indices are rebalanced. The 2022 annual rebalancing, which occurred on December 16 2022, saw record turnover, as market trends throughout the year impacted the style classification of many companies—resulting in notable changes in sector exposure in the Growth and Value indices.

COTW: Personal Savings

Personal Savings

During the COVID-19 pandemic, U.S. consumers accumulated more than $2 trillion in excess household savings, enabling them to spend and to continue spending even as inflation reached decade-high levels. In April 2020, personal saving rates reached an all time high of 33%. However, since then, it has steadily declined, reaching 2.4% in September 2022—the lowest levels since 2005. It slowly started ticking up after September, reaching 3.4% in December, albeit still well below the historical average of 8.9%.

COTW: Existing Home Sales – Now vs GFC

Home Sales

Existing home sales have fallen by 2.6 million over the past 23 months, compared to a 2.4. million decline over the same period during the Global Financial Crisis.

4Q 2022 Commentary: Money Like Water

6040 Returns Dec 2022

As inflation showed signs of slowing in the fourth quarter, both stocks and bonds recovered some of their losses from previous quarters, and most assets ended the quarter with positive returns.

COTW: 2022 Market Recap

2022 Market Recap

2022 was one of the worst years for markets since the 2008 Global Financial Crisis. Record-high levels of inflation and subsequent aggressive monetary policy reactions by central banks across the globe saw both stocks and bonds tumble.

November 2022 Commentary: A Fork in the Road

Liquidity Nov22

Two of the most powerful economies in the world, the U.S. and China, are both facing critical decisions, and their choices will create ripple effects for global economic growth.

COTW: The U.S. Debt Ceiling

12.05

Created in 1917, the U.S. debt ceiling limits the amount the federal government can owe. It was initially used as a tool to make it easier for government to borrow money. Currently, the U.S. debt ceiling is set at just under $31.38 trillion.

COTW: Resilient Retail Sales

11.21 1

U.S. retail sales data was released last week, exceeding expectations and proving resilient in the face of high inflation and continued rate hikes by the Fed. Headline retail sales rose +1.3% in October, exceeding the expectation of +1.0%.

COTW: Financial Conditions

11.14 1

The Goldman Sachs U.S. Financial Conditions Index tracks the current position of financial variables in the U.S. that influence economic activity and therefore the future state of the economy. The index includes variables such as short- and long-term interest rates, U.S. dollar strength, credit spreads, and equity valuations. The higher the index, the tighter financial conditions, and vice-versa.

COTW: Not All Tech Companies Are Built Equal

COTW Template

Like most bear market environments, 2022 has seen growth stocks materially underperform their value counterparts. Of the growth stocks, tech has been among the hardest hit, with the S&P 500 tech sector down 33% year to date — trailing the broader index by over 8.0%. One of the key contributors to the underperformance of growth, and tech, has been the sharp rise in interest rates over the year.

3Q 2022 Commentary: Whac-A-Mole

Fed Tightening vs GSFC

In the first half of the quarter, stocks and bonds rallied on the hopes of a Fed policy pivot, but a sharp reversal in the second half brought new highs for bond yields and new lows in stocks for the year.

COTW: U.S. Dollar vs Commodities

09.26

The U.S. dollar has historically had an inverse correlation to commodities. When the dollar strengthens, commodities become more expensive in non-U.S. currencies, which tends to lead to lower demand and thus lower prices. The inverse applies to dollar weakness.

August 2022 Commentary: Stalemate

European Energy Crisis 1

Terrible global conflict continues with Ukraine resolutely defending itself against Russia, Russia dealing with severe sanctions, and western Europe bracing for a winter marked by significantly limited gas and fuel supply, traditionally secured from Russia.

COTW: U.S. Stocks vs Bonds

09.06

The average 1-year correlation between U.S. stocks and bonds has been negative since 2000, meaning that positive returns in the one asset class has generally been accompanied by negative returns in the other and vice-versa.

Market Note: New Bull or Bear Market Rally

Bear Market Anatomy 1

The “pain trade” rally we outlined in Market Scenarios & Risk Levels is well underway with Technology stocks and high yield bonds up 15.2% and 7.0%, respectively, since July 6.

COTW: Bear Market Rally

08.08

U.S. stocks, as proxied by the S&P 500, have rebounded from their June lows, rallying more than 13% in 33 days. While this rally has provided relief to the market, investor should be cautious in calling the end to the current bear market based on this rebound, as bear markets can experience multiple unsuccessful rallies before markets bottom.

2Q 2022 Commentary: When Doves Cry

Economic Slowdown

The past six months have been the worst start to a year for a traditional “60/40” portfolio since 1932 when the U.S. economy was in the Great Depression

2Q, 2022 Asset Class Return Quilts

2Q22 QUILT

Commodities and energy stocks have so far served as the only two bright spots in the first half of 2022, up 18% and 32%, respectively.

April 2022 Commentary: The Tipping Point

Bonds

Global markets have been roiled by a succession of blows in April – higher bond yields, lingering post-pandemic supply chain imbalances, a commodity price shock exaggerated by the war in Ukraine, and lockdowns across most major cities in China

1Q, 2022 Asset Class Return Quilts

1Q2022

For the second time in two years, the global economy has been thrust into a crisis – first from the pandemic, and now from Russia’s invasion of Ukraine.

October 2021 Commentary: Heating Up

October 2021

The S&P 500 Index had its best month of the year in October, rising 7% and bouncing back from September’s 4.7% loss, its worst month since March 2020.

3Q 2021 Commentary: Bond Vigilantes

3Q 2021

Markets delivered bland returns during the third quarter—a welcome development considering the stellar returns achieved earlier in the year.

2Q 2021 Commentary: Taking Stock

2Q 2021

Most asset prices rose during the quarter amidst continued economic reopening and extraordinary levels of policy accommodation.

Market Note: The Inflation Watershed

Inflation Watershed

For over a decade, the Fed has struggled to hit its internal inflation target despite responding to every episode of economic weakness with increasingly extreme and experimental monetary policy, including 0% interest rates and widescale asset purchases.

May 2021 Commentary: Help Wanted

May 2021

Real assets were the top performers for the month of May due to the continued reopening of the U.S. economy and historic levels of stimulus from Washington

1Q 2021 Commentary: Throw the Confetti

March 2021

At the end of the quarter, investors enjoyed the robust returns of riskier asset classes and policymakers’ continued commitment to extraordinary accommodation.

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