The payroll number was weaker than expected
Christopher Norwood • October 11, 2021

Is your advisor really managing your portfolio?


More mutual funds aren't necessarily better.


Market Update

The S&P 500 rose 0.8% last week to finish at 4391.34. The Nasdaq rose 0.1% as rising interest rates pressured growth stocks. The 10-year Treasury yield rose to 1.612%. The 10-year yield was 1.3% only a month or so ago. Several of the big money banks are anticipating a 2.0% to 2.25% 10-year yield by year-end. Their forecasts assume the Federal Reserve starts reducing its bond-buying this year. Rising rates favor value stocks. High price-to-earnings-growth stocks will continue to suffer if rates continue to rise.


The S&P 500 fell as low as 4278.94 Monday before recovering to 4300.46 by the close. The Monday low was the low for the week. The high for the week was reached early Thursday. The S&P peaked at 4429.97 before trading sideways the rest of the day. Friday’s weak payroll report didn’t have an impact on investors as the S&P traded sideways after the news. The short-term trend is down. The S&P needs to clear 4465.40 to re-establish an uptrend. It will need to break above the 50-day moving average first, which sits at 4440. A break below 4278.94 would confirm the downtrend and set up a test of the rising 200-day moving average at 4250.


Earnings season is upon us. The big banks will start reporting this week. The forecast is for 27% year-over-year earnings growth for S&P 500 companies. Importantly, analysts’ earnings estimates are no longer rising, according to Barron’s. Instead, analysts are lowering estimates, which is more typical. Normally, estimates a year out start high and are lowered throughout the year. The Covid earnings recovery has been different. Earnings estimates were consistently too low and had to be raised. The question is whether the market has priced in the reduced expectations. Investors may not yet appreciate that earnings estimates are dropping once again. The S&P is trading at 20.6 times 12-month forward earnings, well above the 20-year average of 15.5 times. Any earnings disappointments are likely to trigger selling.


Economic Update

Factory orders rose 1.2% in August up from 0.7% the month prior. Core capital goods orders rose 0.6% in August up from 0.5% in July. Rising orders are a positive for the economy. The ISM services index was a strong 61.9% in September. It was 61.7% in August. The strength in the ISM services index suggests the economy is shaking off the delta variant. Any reading above 50% signals expansion and readings above 60% are considered strong.


The payroll number was weaker than expected. September payrolls grew only 194,000, well below the 500,000 forecast. Last month the economy added 366,000 jobs. The unemployment rate fell to 4.8% from 5.2% and average hourly earnings rose 0.6%. Average hourly earnings climbed 0.4% in August. The weaker than expected jobs number was due in part to a 169,000 upward revision to prior months. Seasonal adjustments might also have been affected by Covid. State and local employment fell by 123,000 on a seasonally adjusted basis. Educational workers declined by 180,000 on a seasonally adjusted basis but rose by over one million unadjusted. One indication that the job market is strong is the more than 11 million job openings nationwide. Unfortunately, the labor participation rate fell as the labor force shrank by 183,000.


Knowing What You Own

Building a diversified portfolio is not easy. Mutual fund holdings are not readily available. Mutual funds have latitude in what they own as well. The American Funds Growth Fund of America is a large-cap U.S. growth fund that benchmarks itself to the Russell 1000 Growth index. The Russell 1000 Growth index is 100% large-cap U.S. growth stocks. Yet the American Funds Growth Fund is allowed to have up to 25% of its assets in international stocks. Likewise, the American Funds Growth Portfolio invests in several other American Funds. It currently has 22% exposure to international and emerging market stocks. It also owns both large and small-cap companies. Meanwhile the American Funds American Balanced Fund invests in a broad range of securities including common stocks and investment-grade bonds. Its common stock investments can include international and emerging market stocks. The American Balanced Fund has 54% in U.S. stocks, 11% in international stocks, and 24% in bonds currently. It can change that allocation whenever it wants though.


So how do you know what is in those eight-plus mutual funds that you have in your portfolio? The answer is most people don’t, and that includes their investment advisors. We use a Morningstar program called X-ray to find out. Morningstar knows what investments are in each fund. The X-ray report shows us what the entire portfolio owns. It allows us to see how much credit and interest rate risk investors are taking with their bond exposure. It allows us to see geographic diversification. It allows us to see the sector and industry weightings of the stocks in the portfolio. We can see if the portfolio tilts toward growth or value, large or small, domestic or foreign. It also allows us to see fund overlap. Morningstar calls it the stock intersection report.


Financial advisors are focused on bringing in assets. It is how they get paid. They also want their clients to believe that they are managing their money. Advisors want to spend most of their time looking for new clients. The result is little time spent on actual portfolio management. Eight plus mutual funds give the appearance of complexity and active management. X-ray often puts the lie to that appearance. We almost always find an expensive stealth index portfolio. A portfolio devoid of active management. There are no overweights of one sector or another, no overweights of a particular industry. There is almost always a very high correlation to the S&P 500. And the kicker? There is almost always tremendous overlap in what the mutual funds own. Alphabet, Amazon, Microsoft, Facebook, and Apple, for instance, will show up in five, six, even seven of the mutual funds in the prospect’s portfolio. In other words, many of the mutual funds are the same investment and provide little to no additional diversification. But the optics are good for the advisor trying to make it look as if he’s managing his client’s money.


Knowing what you own is a key requirement for successful portfolio management. Most people don’t, and that includes financial advisors. Not knowing what you own means taking risks without realizing what risks you are taking. There is no way to manage your portfolio without an understanding of your exposures. Save the fees if you can’t manage your portfolio. Build an index portfolio instead. Indexing allows you to know exactly what you own and guarantees that there is no overlap in holdings. Using individual stocks also allows you to avoid overlap. It is the other way to make sure you know what risks you are taking. Norwood Economics uses individual stocks and index ETFs to build portfolios for its clients. We want to make sure we know what our clients own and what the risks are in their portfolios. We want to do what we are getting paid to do instead of only pretending.


Regards,


Christopher R Norwood, CFA


Chief Market Strategist 



By Christopher Norwood February 17, 2025
Executive Summary The S&P finished the week at 6,114.69 The 2-year yield hit 4.38% after the Consumer Price Index (CPI) was released on Wednesday, but ended the week at 4.27% Investors dumped stocks when the CPI report was released Producer Price Index (PPI) has accelerated for five straight months PPI is a leading indicator of consumer inflation Inflation expectations are rising among fixed-income investors The 5- &10-year breakevens are rising The Stock Market
By Christopher Norwood February 10, 2025
Executive Summary The S&P finished the week at 6025.99 The S&P has been trading sideways since 11 November Volatility (VIX) has spiked five times since last fall each time falling quickly back to mid-teen levels Microsoft, Alphabet, and Amazon have contributed to the negative tone with cautious guidance The Equity Risk Premium has been falling over the last 14 years Bonds have been a horrible investment over the last three, five, and ten years The jobs market continues to show strength Consumers' inflation expectations are increasing The stock market is expensive and will return less than its long-term average over the next decade Good stock picking will be critical if investors are to earn a return close to the long run average. The equity risk premium is too low which may make Treasury bonds a better investment than stocks on a risk adjusted basis over the next decade. Treasury bonds may outperform stocks over the next decade but not necessarily over the next few years since the 10-Year could rise another 100 basis points in the short term. The Stock Market
By Christopher Norwood February 3, 2025
Executive Summary The S&P fell 1% last week, closing Friday at 6,040.53 The index hasn’t been able to break clear of resistance The AI space took a big hit Monday Tariffs on Canada, Mexico, and China GDP grew 2.3% annually in Q4 The futures market expected the funds rate to remain at 4.25-4.50% and it did The employment cost index (ECI) for Q4 2024 rose 0.9% QoQ Pending home sales took a hit in December The stock market continues to trend higher There is a relationship between the stock market and the economy More Interesting Charts to review 
By Christopher Norwood January 27, 2025
Executive Summary The S&P hit a new high on Thursday, reaching 6,128.18. The Volatility Index (VIX) fell to a low of 14.85 The VIX has declined sharply from 27.6 The 5.4% decline from 6 December to 13 January doesn’t qualify as a correction Watch Earnings, Inflation, and Interest Rates for the stock market's near-term direction Don't miss the Charts Worth Seeing at the bottom
By Christopher Norwood January 20, 2025
Executive Summary The stock market's best week since Donald Trump’s re-election in November The S&P 500 rose 2.91% The CME FedWatch tool is predicting one cut in 2025 The fundamental narrative was all about inflation Earnings season is in full swing starting this week Higher than-expected interest rates and inflation might put downward pressure on stocks. Inflation expectations have been rising 2025 is likely to be a volatile year for the capital markets Deglobalization means higher inflation
By Christopher Norwood January 13, 2025
Executive Summary The jobs report on Friday sparked stock and bond market selling Economic data hasn't justified rate cuts The Bond market has been signaling its disagreement with the Fed since the September cut The 10-year Treasury Yield is rising. Bond investors see inflation risks The Jobs market is strong Disinflation is slowing Investors should expect more volatility in 2025 Diversification means less portfolio volatility but also lower returns True diversification means always owning something that is underperforming  Diversified portfolios will trail during a bull market
By Christopher Norwood January 6, 2025
Executive Summary The Santa Claus rally was a no-show this year Friday's jobs report might bring volatility Economic data continues to point toward a strong economy The stock market is near all-time highs Corporate bond spreads are near record tights Liquidity is abundant No signs of a recession. The Fed is backing away from aggressive rate cuts. Inflation concerns are re-emerging  2024 in Review
By Christopher Norwood December 23, 2024
Executive Summary The Stock Market dropped 2% last week The Dow ended its losing streak at 10 The Fed cut interest rates by a quarter-point last Wednesday Fewer rate cuts could mean slower economic growth and slower earnings growth Apollo’s chief economist Torsten Sløk predicts a 40% chance of Fed rate hikes in 2025 Value stocks continue to lag growth stocks and the overall market Value will make a comeback. It always does. History doesn’t repeat itself, but it often rhymes~ Mark Twain
By Christopher Norwood December 16, 2024
Executive Summary 50-years of S&P 500 data The Dow ended Friday on a seven-day losing streak 96% chance the Fed will cut by 0.25% this week Stock market strategists are expecting more S&P 500 gains in 2025 Value Investing Outperforms over the Long Run Value can be found in international and emerging markets today Value can be found in the U.S. stock market, but it takes patience
By Christopher Norwood December 9, 2024
Executive Summary Jobless claims report higher than forecast The Cboe Volatility Index (VIX) fell to 12.77, that's low Why is the Fed cutting at all? The S&P likely to finish the year above its current level The 10-year & 2-year Treasury yield are falling The Fed continues cutting despite a strong jobs market and high inflation Investors should look at the “low-flyer” companies that represent better value Mental Accounting and Risk 
More Posts
Share by: