Can Earnings Save Stocks?

Can Earnings Save Stocks?

October 20, 2022

 

This week followed a familiar bear market pattern of big up days followed by smaller losses as the S&P 500 rose a whopping 4.3% over Monday and Tuesday before taking a breather on Wednesday.

A generally strong start to earnings season has buoyed stocks in recent days and lessened recession concerns, though upcoming reports from major tech companies could shift sentiment—the beleaguered NASDAQ 100 index of large tech firms is currently down 32% for the year.

On the monetary front, Federal Reserve Bank of St. Louis President James Bullard, described by Bloomberg as Wall Street’s “Fed guru,” says he expects the Fed’s aggressive interest-rate-hiking cycle to end early next year as inflation falls and the central bank returns to “ordinary monetary policy.” Despite this optimism from one of the Fed’s more hawkish figures, we’re not there yet. The Federal Reserve has telegraphed a fourth consecutive 0.75% hike at the bank’s Nov. 1–2 meeting, and markets are increasingly pricing in another one at the Fed’s December confab.

Here’s what else we’re focused on this week and why it matters:

  • Disarray in the U.K. This morning’s abrupt resignation by Prime Minister Liz Truss after just six weeks leading the government leaves chaos in her wake amid worries that Britain is headed for a rough recession. The U.K. is a major U.S. trading partner and the world’s sixth-largest economy; the fallout from the ministerial musical chairs remains to be seen.
  • Imports to the Los Angeles and Long Beach ports—the country’s two largest—were down 15% and 11%, respectively, in September. These venues typically see an autumn rush of holiday goods pouring in. The culprit? Not the supply chain this time: Concerns about labor negotiations at the California ports prompted shippers to reroute deliveries to the East and Gulf coasts.
  • Remember I-bonds? Back in April, we highlighted the robust 9.62% guaranteed interest on these inflation-indexed U.S. bonds. The clock is ticking—the rate will reset (and likely decline) on Nov. 1. Act now to lock in that yield, but not before clicking here to learn about some of the strings attached (such as the $10,000 limit on purchases). We’d be happy to answer any questions you have about I-bonds.
  • In response to inflation, the IRS announced this week that top marginal tax-rate income thresholds will increase next year by 7% from 2022’s level. The standard deduction will also go up by 7%. Along the same lines, Social Security recipients will receive an automatic 8.7% cost-of-living adjustment starting in January 2023—the largest increase since 1981.

Signal From Static: Valuing Growth or Growing Value?

Co-founder and Chairman Dan Wiener

The growth vs. value debate is in the news again. A well-known hedge fund manager has claimed that true value investing is dead, slain by the ETF juggernaut and those who have switched to computer-driven algorithms to choose stocks, labels be damned.

This comes at a time when “value” strategies have been outperforming “growth” strategies. Traditional value stocks like oil producers and utilities have taken the lead from their growthy tech and consumer-discretionary cousins. And Wall Street pundits are now claiming that value is poised to outperform into the future, while growth remains moribund.

If only it were that simple.

While the labels are an easy out, the trouble is that there are many definitions of what constitutes a growth or value stock.

A simple definition of a growth company is one where profits are growing faster than the markets’ overall. Of course, this ignores the fact that, for instance, biotechnology companies often show no earnings for years as they burn cash to discover the next great therapy. Amazon, one of the best-performing growth companies of all time, had zero profits to show for its growth for years. Still, I don’t think anyone would consider either Amazon or the typical biotech to be value companies, which typically see their shares selling for lower valuations relative to their earnings or book value, and which often pay a dividend.

Here’s where it gets tricky, though. Apple is certainly a growth company, but it pays a dividend. Many of the largest U.S. banks were, and still are, considered value companies, yet for years they paid no dividends at all.

Over the almost 45 years that the Frank Russell Company has calculated returns for large growth (Russell 1000 Growth index) and value (Russell 1000 Value index) stocks,­ neither one has outperformed the other.

Note: Chart shows changes in relative value between hypothetical investments in the Russell 1000 Growth and Russell 1000 Value indexes on a monthly basis from December 1978 to September 2022. Every 0.1 change represents a 10% change in relative value. The line rises when the growth index is outperforming; a falling line indicates the value index is outperforming. Sources: Morningstar, Adviser.

Value stocks and growth stocks have traded leadership and, as the chart so clearly shows, the points when style preferences turn can be swift. Attempts to time the changes are fraught.

Yes, there’ve been periods when growth beat value—such as the 26 months from December 1997 through February 2000 (up 31.8% annualized vs. 4.2% for value). Equally, there have been periods when value outran growth. Yet, at the end of the day, after more than four decades, growth stocks and value stocks have come out at the same place.

Sources: Morningstar, Adviser.

So, at Adviser we don’t try to trade styles. Diversification has always been a bedrock principle of our investment approach. We try to maintain a balance between value and growth stocks—particularly in our index-based strategies. This ensures we participate no matter which style is leading the performance derby.

When assessing the state of the markets and the state of your portfolio, I believe it’s important to ignore—or, at a minimum, be highly skeptical of—attempts to use simple labels to describe more complex investment strategies.

Instead, continue to focus on core investment principles including diversification, time in the markets and controlling risk in the furtherance of meeting your objectives and long-term goals. Don’t let the noise of the growth-vs.-value debate distract from the signals of smart portfolio management.

Chart of the Week: The Upside to Bonds’ Down Year

Interim Chief Investment Officer Jeff DeMaso 

There’s no sugarcoating it: 2022 has been the most challenging year in the bond market in a generation.

Bond investors have had it pretty darned good for a long time. From 1975 through 2021, high-quality bonds returned 7% on average and typically only declined 3% from their highs during each calendar year. That’s an attractive level of return with little downside risk. The worst intra-year decline was a 9% dip in 1980—more than four decades ago—and bonds still finished that year up 2% or so.

Then 2022 happened. Bonds are down 15% so far this year, and the prospects for finishing the year in the black are slim.

Note: Chart shows calendar-year returns and the largest intra-year declines for the Bloomberg U.S. Aggregate Bond index from 1976 through September 2022. Sources: JPMorgan, Bloomberg.

That said, there is a silver lining to this story. The outlook for bonds has improved dramatically. The Bloomberg U.S. Aggregate Bond index—a broad measure of high-quality bonds—now yields 5.1%. A bond’s yield has historically been a good predictor of its long-range future return; if that holds true from today onward, it’s reasonable to expect bonds to return around 5% per year over the next decade.

So yes, it’s been a challenging year. But if bonds made sense as part of your long-term financial plan at the start of 2022, they have an even greater role to play in the years ahead.

What’s the State of Your Estate Plan?

Account Executive and Financial Planner Diana Linn

It’s National Estate Planning Awareness Week—yes, there is such a thing—yet less than half of all Americans have an estate plan in place. What gives?

One common misconception is that estate planning is only for older or extremely wealthy individuals. We disagree. Here’s why almost anyone reading this needs to get on the estate planning train.

  1. Protect your wishes. The most important reason to put a plan in place is to ensure your wishes for the settlement of your estate are carried out. A will alone is not enough to protect how, when and to whom your assets and possessions are distributed upon your death.
  2. Avoid probate. When no solid estate plan is in place, individual states rely on a probate process to sort things out—and offer varying ways to avoid it. With probate, decisions about all of your assets, all of your belongings and even who would have custody of your minor children could go through a public and potentially lengthy court process where a judge ultimately makes the call. Obviously, this is something to avoid like the plague.
  3. Reduce taxes. Suffice to say, no one likes to pay taxes. Depending on which state you live in, your assets could be taxed at both a federal and state level. A well-crafted estate plan, completed in alignment with your financial plan, can help ensure you don’t pay more to the government than necessary.
  4. Protect yourself and your beneficiaries. An estate plan does more than protect your assets. It allows you to determine guardianship of minor children and clearly establish who can make medical decisions on your behalf if you are unable to do so.
  5. Get peace of mind. A thorough estate plan should clearly lay out your wishes before you are unable to do so. The goal is to minimize family conflicts down the road while making an emotion-laden process easier.

Even if you are young and single, putting an estate plan in place is a smart move now. Call us to talk through your options.

Podcast: Streamlining Your Assets

Life happens. You switch jobs, sell an old house, get hitched…and at each step along the way, your finances get a little more complicated, with new retirement plans, bank accounts and investment opportunities. Sometimes keeping it simple can make managing your finances a lot easier on you—and benefit your bottom line. In this episode of The Adviser You Can Talk To Podcast, Interim Chief Investment Officer Jeff DeMaso and Manager of Financial Planning Andrew Busa discuss the upside of consolidating your assets.

There’s nothing like the peace of mind that comes from knowing where you stand and that your financial plans are on track. Click here to listen now!

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the financial planning, investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question and one of Adviser’s wealth management or investment specialists will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser in the Media

Portfolio Manager Adam Johnson appeared on Fox Business this week to discuss the importance of the two “E’s”—earnings and employment—and his latest views on the Federal Reserve’s inflation policy.

In this week’s Adviser Takeaways, Senior Research Analyst Liz Laprade looked at the potential positive impact of third-quarter earnings reports, while Financial Planner Diana Linn covered the importance of proper estate planning.

Looking Ahead

Next week brings an abundance of informative reports. We’ll be looking at reads on manufacturing, the service sector, home prices, durable goods, consumer sentiment and spending, disposable income, inflation, wages, and the first estimate of third-quarter GDP.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser

Adviser is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


Please note: This update was prepared on Thursday, October 20, 2022, prior to the market’s close.

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