As the first quarter of 2022 comes to a close, we have had a major increase in market volatility, as well as geopolitical volatility– more in-depth analysis of market volatility can be found later in this newsletter. Did you see the interview this week with CNN+ anchor Chris Wallace on the Stephen Colbert Show, where he blamed his dad, Mike Wallace, and the news program 60 Minutes for the current state of distrust in the news media? You must be kidding me. 60 Minutes has always been a great news program. It’s not perfect, but better than most.
Sorry Chris, are you sure that this is the issue with the news media? Honestly, the problem is you and your cohorts. 60 Minutes made money, and somehow you blame your father for that. The poor man died 10 years ago! Let him rest in peace. The problem is the media has turned into a circus, and you are the head clown- or should I say celebrity. You have made millions of dollars over your career, but all you had to do was report the news. No, you and your celebrity friends are the news. You actually believe that you can have any credibility by simply switching from Fox News To CNN+?
I love to read and use the SmartNews app early in the morning when I can’t sleep. It aggregates all local and national news from multiple sources. However, what I read this week disgusted me. In Florida, we seem to have passed a controversial bill, HB 1557, by the State of Florida Legislature and signed by Governor DeSantis. Now that I can’t trust the media, I decided to read the bill myself. HB 1557 is seven pages long in total- I read articles on it that pedaled fake news that were longer than the entire bill! The media is complicit in their own distrust. If you don’t believe me, go read the bill yourself.
Now it takes me more time to research an article than to read the entire of length of the story. I would not have known that the Oscars were on TV the other night except that the news won’t stop talking about some slap in the face, which I personally believe was fake? All that to say, Chris Wallace might be right about one thing — how on God’s green earth do we pay people $25 million to read the news? By the way, where the heck is Hunter’s laptop?
Three Market Drivers
We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.
Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.
Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.
Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.
Here is a breakdown of where each market driver currently sits:
As expected, the Federal Reserve raised the federal funds rate by 0.25% and announced that they anticipate seven additional rate hikes throughout the rest of 2022. Also, the Fed expects GDP growth of 2.8% and inflation of 4.3% in 2022.
Both the S&P 500 and Dow Jones Industrial Average have recovered their 50-day and 200-day moving averages, which are known as support levels. The Nasdaq-100 has recovered its 50-day moving average and is currently just below its 200-day moving average.
Despite a strong week in the market, the AAII Investment Sentiment Survey did not see the percentage of bullish investors increase, as it remained at 32%. However, the percentage of bearish investors did decrease from 35% to 28%, with those bears moving into the neutral category.
Outside Days: Measuring Volatility
In volatile markets like the one we are currently experiencing; it is easy to wonder whether today’s market environment is normal when compared to the history of the stock market. One way to measure market volatility is by measuring Outside Days. Outside Days are simply days in which the market, particularly the S&P 500, experiences a return that is either greater than a gain of 1% or a decline lower than -1%; in layman’s terms, they are simply volatile days in the stock market.
Historically speaking, an average of 24% of trading days each year in the S&P 500 are Outside Days. By knowing this historic average, we are able to categorize years into two categories: Outside Years and Inside Years. Outside Years, or volatile years, are years in which more than 24% of trading days are Outside Days. Inside Years, or calm years, are years in which less than 24% of trading days are Outside Days. While seemingly insignificant, there is a clear dispersion in how Outside Years perform versus Inside Years.
From 1928 to 2021, the S&P 500 has experienced 54 Inside Years and 40 Outside Years. Inside Years have an average return of 12% and have a positive return 80% of the time; in fact, the S&P 500 has only had one negative Inside Year in the past 40 years (1994). Positive Inside Years historically average an annual return of 17%, whereas negative Inside Years have averaged -9%. If history is to be our guide, Inside Years and their calmer, steadier nature have been very friendly to investors. Notable examples of Inside Years include 2021, 2019, and 2017.
On the other hand, Outside Years have been a coin flip. Of the 40 Outside Years since 1928, only 53% of them have had a positive return. Outside Years have historically had very strong moves in both directions, which cancel out to create an average annual return of just 3%. Positive Outside Years have historically averaged 21% for the year, while negative Outside Years average an annual return of -17%. Notable examples of Outside Years include 2020, 2018, 2009, and 2008.
It may be impossible to know whether a year will end up as an Inside Year or Outside Year before it is finished, but tracking Outside Days throughout the year can help us to know what to expect. For perspective, 2022 is currently considered an Outside Year, with over 50% of trading days being Outside Days; if this pace continues, it would be the most volatile year since 2008. While Outside Years are not inherently negative (2003, 2009, and 2020 are recent examples of strong Outside Years), they do hint to investors that, even if the year does end with strong performance, it may be a bumpy ride.
Large Cap indices
S&P 500: -3.44%
Dow Jones Industrial Average: -3.05%
Mid and Small Cap indices
S&P 400 (Mid Cap): -3.85%
S&P 600: (Small Cap): -4.95%
Russell 2000: -6.87%
MSCI EAFE Developed Index: -5.65%
MSCI Emerging Markets: -6.71%
MSCI ACWI ex-US: -5.13%
Economic sector indices
Basic Materials: -1.51%
Communication Services: -10.30%
Consumer Discretionary: -7.39%
Consumer Staples: -1.21%
Real Estate: -5.77%
MANGO : The New FAANG?
When it comes to investing, one of the most prominent phrases used is the acronym FAANG, which is a simple way to refer to five of the largest U.S. companies: Facebook, Apple, Amazon, Netflix, and Google. While this acronym has been popular since 2013, Bank of America turned heads last week when they announced a new acronym that they have their eye on: MANGO. Analyst Vivek Arya coined the term MANGO as a way of grouping together companies that he believes will lead the way moving forward: Marvell Technology, Advanced Micro Devices, NVIDIA, GlobalFoundries, and onsemi. However, what makes Arya’s acronym unique is that it focuses entirely on a specific industry: semiconductors. Today, we’d like to dive into the sector to understand their impact on today and the future.
Semiconductors, better known as “chips”, are a vital component of electronics that allows electricity to conduct between conductors and insulators. While this may sound “jargony” or boring, the different types of chips and their various functions are already impacting your everyday life. For example, analog chips are used in “real world” devices that focus on a basic function, ranging from medical devices to thermostats. Digital chips, on the other hand, focus on the ability to compute. While digital chips have already become commonplace in computers and smartphones, analysts such as Arya believe that digital chips may still be in their infancy.
Regarding digital chips, there are two main types of chips: CPUs and GPUs. CPUs (Central Processing Units) are best known as the “brain” of a computer, as it processes all of the commands required to allow programs to run. The benefit of CPUs is their ability to process multiple types of programs quickly and effectively. GPUs (Graphics Processing Units), as the name suggests, specializes in tasks that require rendering 3D images and graphics; when you think about how much the quality of images has improved in videos and gaming, GPUs are responsible. However, while GPUs got their start in gaming, they may be integral to other parts of the future economy.
For a vehicle to be autonomous, there are two key components to its success: the ability to visualize the world around it, and the ability to make split-second decisions based on this available information. NVIDIA’s DRIVE, a computer platform specifically designed for autonomous vehicles, is meant to use both CPUs and GPUs to teach vehicles how to react in various situations by balancing a CPU’s ability to multitask with the GPU’s ability to project these potential scenarios. How soon after a car can be taught how to drive itself will other machinery be able to demonstrate full artificial intelligence? Only time will tell, but fully functioning A.I. may be here sooner that we think.
While semiconductors are already used in everyday devices such as gaming consoles and smartphones, it is the continued development of chips specialized for artificial intelligence that has analysts like Vivek Arya intrigued. While it is too early to know whether Arya’s MANGO acronym will stick, it does show that Wall Street continues to demonstrate an interest in the semiconductor industry and its impact on the future of our world.
Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor.