From December 31, 2017 through December 31, 2021, Apple, Microsoft, Alphabet, and Amazon massively outperformed the 91% cumulative return  of the S&P 500 Index. Since those four companies represented the largest weights in the Index during those years, they also contributed significantly  to the 17.6% average annual return over that four year period. The “worst” performer, Alphabet, almost doubled the index with a 177% cumulative  return. The best? Apple, with a 339% cumulative return. Microsoft increased 314% and Amazon 185%. The biggest and the best. 

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Setting Expectations
In October’s Market Minute, we wrote, “Fed Chairman Jerome Powell was very clear in his September 21st press conference when he said “First,  we’ll want to see growth continuing to run below trend […] We think of trend as being about 1.8% or in that range.” And in December we  started the Market Minute with “For the three calendar years ending in 2021, the price appreciation of the S&P 500 Index was 90%.”

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As 2022 ended, many capital market participants gladly said adieu. It was a year of horrid returns for traditional portfolios, a stellar year for alternative strategies, and possibly the year that forced regulatory agencies to get more serious about their oversight of the digital investment arena after a string of historic thefts, alleged frauds, and bankruptcies.  Inflation remained quite high at 7.1% (CPI YoY) but continued its downward trajectory in the 4th quarter. Risk assets rallied on the hopes that the Federal Reserve (the “Fed”) was nearing the end of its tightening cycle.  Mortgage rates moved below 7% but are still at levels not seen in over a decade.  Concluding that peak inflation is in the rearview mirror presumes many things: well behaved energy markets, resolute Central Banks, less international strife, reasonable environmental regulations, and disciplined government spending. None of these can be taken for granted or even considered probable, in our opinion.  

Investor focus seems to have shifted from inflation as a juggernaut to how soon the Fed’s pivot on interest rates will come and flash the “all clear” to go all in on risk.  The Fed has repeatedly said high rates are here to stay for quite some time and they will not be cutting in 2023.  In our view, the long end of the U.S. Treasury market and the outsized positive moves of equities in response to softening economic data convey that the markets don’t believe the narrative and think sooner than later, the Fed will fall back on their old ways of priming the economy with easy money.  Inflation still exceeds growth in the U.S. by a wide margin, only a robust job market prevents classifying the current economic environment as solidly stagflationary.    

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Following three consecutive quarters of negative total returns for the average closed-end fund (CEF), CEFs rebounded during the fourth quarter and posted an average return of 6.4%. It was a broad rally in the fourth quarter with the average equity CEF returning 9.3%, fixed-income CEF returning 4.9%, municipal CEF returning 4.4% and taxable fixed-income CEF returning 5.1%. Equity CEFs benefitted from the 7.6% return for the S&P 500 Index during the quarter. Fixed-income CEFs benefitted from positive total returns from several key fixed-income indices for the quarter including a 3.9% return for the S&P National AMT-Free Municipal Bond Index, a 4.1% return for the iBoxx USD Liquid High Yield Index, a 3.1% return for the iBoxx USD Liquid Leveraged Loans Index, a 1.9% return for the S&P U.S. Aggregate Bond Index and a 4.6% return for the iBoxx USD Liquid Investment Grade Index. (Source: S&P)

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Asset Flows Monitor January 2023 Edition

• Net inflows for US-listed ETFs totaled $41.1 billion in December, bringing total ETF assets under management to $6.46 trillion.
  
  
• Equity ETFs had net inflows totaling $24.3 billion in December, bringing trailing 12-months (TTM) net inflows to $366.2 billion.
  
  
• Fixed income ETFs had net inflows totaling $17.5 billion in December, bringing TTM net inflows to $195.2 billion.
  
  
• Commodities ETFs had net outflows totaling $1.5 billion in December, bringing TTM net outflows to $4.2 billion.  Broad commodities ETFs (-$1.1 billion) was the weakest commodity sub-category in December.

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For the three calendar years ending in 2021, the price appreciation of the S&P 500 Index was 90%. The total return with dividends was 100%. Only 10% of the return came from dividends. That belies history. According to Ibbotson Associates, a division of Morningstar, dividends have provided approximately 39% of the 10.46% average annual total return on the S&P 500 Index from 1926 through 2021.

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Asset Flows Monitor December 2022 Edition

• Net inflows for US-listed ETFs totaled $66.0 billion in November, bringing total ETF assets under management to $6.56 trillion.
• Equity ETFs had net inflows totaling $41.8 billion in November, bringing trailing 12-months (TTM) net inflows to $421.5 billion.
• Fixed income ETFs had net inflows totaling $26.1 billion in November, bringing TTM net inflows to $199.1 billion.
• Commodities ETFs had net outflows totaling $1.5 billion in November, bringing TTM net outflows to $5.2 billion.  Precious metals ETFs (-$1.3 billion) was the weakest commodity sub-category in November.

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Asset Flow Monitor November 2022 Edition

• Net inflows for US-listed ETFs totaled $91.3 billion in October, bringing total ETF assets under management to $6.30 trillion.
• Equity ETFs had net inflows totaling $61.7 billion in October, bringing trailing 12-months (TTM) net inflows to $440.0 billion.
• Fixed income ETFs had net inflows totaling $31.9 billion in October, bringing TTM net inflows to $186.8 billion.
• Commodities ETFs had net outflows totaling $2.9 billion in October, bringing TTM net outflows to $2.2 billion. Precious metals ETFs (-$2.0 billion) and broad commodities ETFs (-$0.8 billion) were the weakest sub-categories in October.

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It's well known that companies underpromise and overdeliver on earnings. They set the bar low and analysts follow along with their estimates and a modest earnings outperformance is almost always the result once earnings are reported. Just look at the average earnings surprise for the S&P 500 Index each quarter from 2015 through 2019 [see chart in link below]. "Surprises" averaged 5.3% over those 20 quarters. Surprises were always pleasant and positive. In truth, the market wasn't really surprised during those quarters. It expected modest outperformance over the consensus. Everyone knows how it works. But starting in the second quarter of 2020, the earnings outperformance actually did surprise the market. For the last three quarters of 2020 and for all 4 quarters of 2021, earnings surprises averaged 16.1%. It's a significant reason we saw such big stock market gains in the last three quarters of 2020 (the S&P 500 Index was up 47% for those final 9 months) and 2021 (29% for the year). We can see, however, that the first 3 three quarters of this year are back to being more normal "surprises." Our expectation going forward is that we are back to normal when it comes to outsized earnings beats. The market won’t reward average surprises with high returns.

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