From the desk of Willie Delwiche.

Moving into commodities when they are trending higher versus stocks increases return and lowers risk relative to otherwise static equity exposure. Commodities may not always earn a spot in our portfolios, but we do well to remember to include them in the asset allocation conversation. 

Why It Matters: Commodities can go nowhere for years on an absolute and relative basis. 90% of the time from 2012 through 2020, the CRB index was in a downtrend relative to the S&P 500. During that time period commodities got the reduced portfolio exposure that they deserved. In many cases they got dropped from the conversation all together. Commodity leadership of the last couple of years revealed that to be short-sighted. With commodities cooling off and stocks again getting the upper hand on a relative basis, we can reduce our exposure, but let’s not exclude them from the conversation. As long as an asset has a seat at the table, we can choose to minimize our exposure to it. But...

From the Desk of Willie Delwiche.

The market has been focused on the headline CPI and eager to declare the inflation battle won. The Fed is less concerned with changes that are fueled by outliers and focuses more on the central tendency and underlying trend in inflation. The median CPI in January posted its third largest 1-month change on record and the 12-month change climbed to a new high. So long peak inflation - we hardly knew you.

Why It Matters: With the market focused on the pullback in headline inflation, bond yields pulled back from their recent highs expectations of rate cuts later this year became more widespread. As it has become clear that the Fed is focused on still-persistent underlying inflation, the market has had to play catch-up. Fed funds futures now match the Fed’s expectations that rates will finish this year above 5% and today for the first time in 15 years we have Treasury yields with a 5-handle. While inflation expectations are on the rise and the underlying trend in yields remains higher, we are not seeing signs of macro-related stress. That keeps the path of least resistance...

From the desk of Willie Delwiche.

Both our Risk On Index and our Risk On and Risk Off (RO/RO) Ratio have climbed to their highest levels since early last year and in the process crossed back above key levels that provided support during 2021 but were violated as conditions deteriorated in 2022.

Why It Matters: After an unprecedented combination of volatility and weakness in 2022, we are looking for evidence that the strength that has been seen in January marks a sustainable departure from last year and not just more of the same. There is still work to be done from a longer-term trend perspective and macro questions linger. Unlike the rallies that emerged and faded in 2022, however, this year’s gains are being accompanied by more appetite for risk. As long as the Risk On index and the RO/RO ratio are showing improvement (and that improvement is being confirmed elsewhere) it is probably premature to lean against the strength we have seen. That being said, not all opportunities are created equally....

From the desk of Willie Delwiche.

Incoming economic data has been weaker than expected but our Macro Health Status report suggests the market is looking past current risks to brighter days - or perhaps it’s just whistling past the graveyard.

Why It Matters: On its surface, incoming data is consistent with recession. Aggregate hours worked in the economy are shrinking, real retail sales and industrial production are contracting and housing market activity remains a shambles. The Leading Economic Index from the Conference Board is signaling that a recession is on its way - and it has an unblemished record in this regard. But we are not seeing evidence of building stress across our macro indicators. The longer the incoming data disappoints and the longer the Fed feeds the economy a starvation diet of liquidity (M2 is declining at a never before seen pace...

From the desk of Willie Delwiche.

The Bank of Japan hasn’t officially raised rates and is continuing to buy Japanese government bonds. But its surprise decision to stop defending the 0.25% ceiling on 10-year bond yields has reverberated through the global financial markets.

Why It Matters: While bond yields around the world climbed to new highs over the course of 2022, the Japanese 10-year yield was held at 0.25% through active intervention on the part of the Bank of Japan. Funding those purchases kept the Yen under pressure for most of the year. The de facto rate hike that allows the 10-year yield to move up to 0.50% brought strength in the Yen and weakness in the US dollar. Precious metals caught a bid and bond yields around the world moved higher. The yield on the German 10-year bond is approaching the 10-year high it reached in October and US yields are climbing as well. The lasting impact on equities from this Bank of Japan pivot is clear. A weaker dollar could be a tailwind for stocks (they...

From the desk of Willie Delwiche.

The market’s focus is moving on from monthly inflation prints and toward the health & resiliency of the economy in light of the cumulative tightening by the Fed. Our macro health status report remains mixed, but is holding steady for now.

Why It Matters: Stocks celebrated the release of the November CPI report that showed inflation cooling more than expected. Those early gains have proven hard to hold on to. At this point, peak inflation is a rear-view issue and the path of inflation going forward is more important for the market. It is possible that it retreats quickly, but more plausible that after an initial pullback it stabilizes at a relatively high level. The sticky CPI (published by the Atlanta Fed) actually moved to a new high in November. As the market reckons with the path of inflation, the need for additional rate hikes and the impact on the economy of all this, our health status report will provide a timely assessment of the most important question...

From the desk of Willie Delwiche.

The trend for the S&P 500 has now fallen for 34 weeks in a row. That is the longest sustained decline in the trend since the Financial Crisis ended over a decade ago.       

Why It Matters: Since 1950, the trend for the S&P 500 has been rising nearly 70% of the time. In the process the index has climbed from below 20 to above 4000. During a majority of this time (from the 50s through the 80s) extended periods in which the trend was rising were followed by extended periods in which the trend was falling. Downtrends started to get shorter & shorter in the 90s and outside of the bursting of the internet bubble  (2000-2002) and the Financial Crisis (2007-2009) that has remained the case. Even the COVID crash came and went so quickly that a down-trend hardly had time to emerge. Outside of the two episodes in the 00s, the current downtrend is proving to be the most persistent since the late 1980s. Investors that have been conditioned to quick downside...

From the desk of Willie Delwiche.

The yield curve is getting a lot of attention right now, and deservedly so. An inversion in the spread between the 10-year and 3-month Treasury yields has an unblemished record in anticipating recessions. But beyond that suite of indicators, there is actually evidence that macro conditions have stopped deteriorating.      

Why It Matters: Despite a recent lull in day-to-day price swings, 2022 has been one of the most volatile and weakest years for stocks in the past half century. Whether those trends persist into year-end or strong post-midterm election seasonal tendencies have investors feeling less bruised and battered by year-end likely depends on macro conditions. This is not a question of whether conditions are good or bad, but whether they are getting better or worse. Since last month our Macro Health Status report has actually improved. More favorable corporate bond yield momentum and stability in the earnings momentum trend have helped offset the yield...

From the desk of Willie Delwiche.

The broker-dealer index (XBD) has eclipsed its August high and almost back to even on the year. Relative to the S&P 500, XBD has broken out above its early 2021 peak and is now at its highest since 2008.     

Why It Matters: Seeing uptrends in areas outside of just the Energy sector suggests rally participation may be expanding. This gives investors who can move beyond just the indexes more opportunities to lean into strength. But the broker/dealer group isn’t just any group. It’s typically seen as a leading indicator for the S&P 500 overall. Relative strength from this group is good for the market overall and says encouraging things about overall risk appetite.      

We take a Deeper Look at investor risk appetite and whether the recent improvement is likely to be sustained.

From the desk of Willie Delwiche.

Going back to 1950, the S&P 500 has always always been higher one year after midterm elections than it was on election day. But over the shorter-term, the market has had a more mixed reaction to the votes being cast and counted.     

Why It Matters: Investors are looking for a catalyst that could help 2022 finish on a more positive note and allow 2023 to begin with some positive momentum. There is no denying the historical pattern for stocks to rally in the wake of midterm elections. No doubt there will be pockets of strength in this cycle as well. Some of the dominant themes that have been present already in 2022 (e.g. more volatility than strength and a deteriorating liquidity backdrop) argues for seeing evidence of strength before embracing the pattern.     

We take a Deeper Look at market challenges that aren’t going away just because the voting is done and where investors could look for signs that conditions are improving.

From the desk of Willie Delwiche.

Stocks and bonds are enduring one of their worst years on record. Yet the St. Louis Fed’s Financial Stress Index dropped to never before seen levels. It’s off its lows but still indicates less stress in the financial system than at any previous point in the past quarter century.   

Why It Matters: Aggressive tightening by central banks around the world has pushed sovereign yields higher and kept interest rate spreads subdued. That has made financial stress less apparent. Until this changes, there is little impetus for the Fed to pivot away from its intense focus on bringing down inflation.    

In taking a Deeper Look we see how the specific characteristics of this cycle may be masking signs of stress that are present just beyond the headlines.

From the desk of Willie Delwiche.

Over the past year, this old Wall Street saying has been more than an adage. It’s been a reality. Correlations across the ETFs that we use as proxies for various asset classes are overwhelmingly positive and on the rise. The exception has been Commodities (DBC), though many asset allocation conversations don’t even include commodities.   

Why It Matters: Elevated correlations have left investors with no places to hide as stocks enduring historic levels of volatility and weakness. 2022 has been a risk off environment where risk off assets have been as weak as risk on assets. Trying to navigate this backdrop has led to frayed nerves and impatience for the arrival of better times. Unfortunately this year has done little to show it deserves the benefit of the doubt so far.   

In taking a Deeper Look we put 2022 into context, review our indicators of risk behavior and highlight some areas where risk appetite may be improving.