Can I See Clearly Now?

Oh, yes I can make it now the pain is gone; All of the bad feelings have disappeared;
Here is that rainbow I’ve been praying for – lyrics from “I Can See Clearly Now”


Observers of the market entertained themselves for much of November debating what the stock market was most likely to view as good news. Signs of slower economic growth said some as that was what was necessary to get the Federal Reserve to cease and desist from its current interest rate rising cycle. Others though, more concerned about the possibility of economic recession, were looking for signs that the economy still possessed some semblance of a healthy heartbeat. So, the market’s reaction to the November employment numbers released on Friday, December 2nd was an event much anticipated. The release of the numbers at 8:30 am that day showing surprising strength in the numbers of people finding employment was greeted in the futures market with an unequivocable thumbs down. Shortly thereafter, the Dow Jones Industrial Average was down 500 points. That seemed to make matters clear. The market is more afraid of Fed Chairman Jay Powell than it is of a bad economy. At markets close however, that number was positive, albeit a modest 35 points. And so, the debate will continue.

Fortunately for investors though, there wasn’t any debate that November was a month to be thankful for. The equity portion of investor’s portfolio rose near 7% for the month and the foreign markets rose an eye popping 12 ½%. November succeeded October’s market with its 8.10% return on the S&P 500 (November’s return was 6.02%) so we now have a market that has come close to reducing by half the market’s low year to date on September 30th when it was down 24%.

For stocks, we have recently been grateful, but it has actually been the bond market providing the greater amount of entertainment value. Almost everyone understands the logic that committing one’s capital for a greater amount of time will normally be rewarded by the promise of a higher return. That simply rhymes with risk and return. If I’m going to buy a 30 year US Treasury bond I would expect that the interest I will be paid will be materially greater than if I purchase a 90 day Treasury bill. The current yield curve measuring maturity and interest rates at which the US Treasury is currently required to borrow, makes sense only if it is held in from of a mirror. The current 90 day Treasury bill rate is 4.37%. The 30 year Treasury bond rate is…3.80%. Quite literally the United State Treasury will now pay you more to lend them your money overnight than for close to a third of a century. To say that something doesn’t make sense is a good deal easier than trying to make sense of it, but let’s make a brief effort to do so. The financial markets and the federal reserve seemingly inhabit different planets, or at the least have very different perceptions of reality. The Fed is raising rates ostensibly to combat inflation but if the financial markets agree with the fed that inflation is likely to be persistent then why do we have the thirty year rate at 3.80%? Investors perhaps are better served listening to the bond market than the economists at the federal reserve.

Stock market bears are not yet an endangered species. A headline from today’s press headlines “From Bank of America to Morgan Stanley, Wall Street giants are expecting stocks to crash more than 20% next year.” The AAII (American Association of Individual Investors) survey of November 30th indicates that 24.5% of investors are bullish versus 40.4% that are bearish. A Google search reveals that there are 290 million references to a bull market contrasted to 653 million to a bear market. My last name isn’t Wilson, and I don’t work for Morgan Stanley, but allow me to offer a few tidbits of insight on this subject. For the past eighteen months, where the dollar has gone, so has the stock market gone, but in the opposite direction. Through most of this year it has been dollar up and stock market down. Since the market low of September 30th, US dollar is down 6.8% and the S&P 500 is up 13.9%. And the S&P 500 is actually a laggard. Small Cap stocks (the S&P 600) and Mid Cap stocks (the S&P 400) are both up 17% and Foreign Developed Markets (EAFE) is up 20%. Those aren’t rallies in a bear market. Those are market reversals. Enjoy the ride.
Year to date, investors have experienced three types of markets, those where both stocks and bonds were down, those where stocks were up and bonds were down and now, most recently, where stocks are up and bonds are flat. 60% stock and 40% bonds and cash portfolio investors have had their losses for 2022 at end of the 3rd quarter of almost 20% cut close to half with those losses now at 10%.

Let’s close with a few more words about the respective fortunes of the value and growth sectors of the S&P 500. Year to date value is now close to break even with a -1.4% return, contrasting with growth’s -23.6%. In the past three months those returns have been +7.8% and -1.4%. For November value returned 5.9% and growth 6.2%. The final day of the month, Tuesday the 30th, the S&P rose 2.8% with value contributing 2% but growth 4.4%. So, what do YOU think? If you could only own one or the other, which would it be?

Mark H. Tekamp/December 5, 2022