We have met the enemy and he is us
Despite the strength in the job market, and until recently, an advancing stock market, consumers are increasingly souring on the future. The University of Michigan Consumer Sentiment Index just fell to its lowest level in a decade. The culprit – inflation. Consumers are projecting that their financial situation will deteriorate over the coming year, and they aren’t happy. But will the reason for that negative sentiment front load even more spending or will the fact that real wage growth isn’t keeping up with inflation temper the voracious consumer appetite?
According to the U.S. Bureau of Economic Analysis, personal consumption expenditures fell during the month of December, but on a year-over-year basis the growth in spending remained well above the levels seen over the past decade. And the January retail sales number just came in above expectations at 3.8%. On top of that, according to the Chicago Fed, the Great Resignation contributed about 1% to annualized inflation for much of 2021. Those individuals who were employed and switched jobs certainly helped their own pocketbooks but contributed to the already growing inflationary problem.
On the equity front, February has played out much like the prior two months. Through Valentine’s Day, the previously unloved companies in the Russell 1000 Value Index held onto a 287-basis point (bps) advantage over their glamorous and highly pursued peers within Russell 1000 Growth Index, bringing their trailing three-month advantage to 9.1%. Energy stocks and financials have been in the driver seat, while communication services and tech stocks have been unceremoniously dumped.
Emerging market, international developed, and U.S. small cap stocks have all been outperforming U.S. large caps, with month-to-date returns of 1.1%, 0.4%, and -0.2%, respectively. And on a trailing 12-month basis, the S&P 600® trades at about the biggest discount to the S&P 500® that we’ve seen since the tech wreck. For those with long memories you might recall that turned out to be a pretty good time to own small caps on a relative basis. As the NASDAQ plummeted by over 80% from March of 2000 through September 2002, quality small caps, represented by the S&P 600, were down just 8%, and the Russell 2000 Value Index was up almost 14%.
Elsewhere, all things rate sensitive – preferred stocks, REITs, long-term Treasuries – have continued to get punished, as the yield on the 10-year advanced by 26 bps since the end of January. In fact, all fixed income categories that we model are in the red, both month-to-date and year-to-date. But the increase in longer term rates may be coming to an end as the market anticipates ever more action by the Fed on the front end of the curve, which has had a material flattening effect.
To the spree shoppers and the job hoppers, we’re watching you.
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Frontier does not directly use economic data as a part of its investment process.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.
| ASSET CLASS | INDEX | INDEX DESCRIPTION |
| U.S. Large Cap Growth | Russell 1000 Growth | Measures the performance of the large- cap growth segment of the US equity universe. |
| U.S. Large Cap Value | Russell 1000 Value | Measures the performance of the large-cap value segment of the US equity universe. |
| U.S. Small Cap | Russell 2000 | Measures the performance of the small-cap segment of the U.S. equity market. |
| U.S. Quality Small Cap | S&P 600 | Measures the performance of the quality small-cap segment of the U.S. equity market. |
| U.S. Large Cap Equity | S&P 500 | Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ |
| International Developed Equity | MSCI EAFE | Designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. |
| Emerging Markets | MSCI Emerging Markets | Captures large and mid cap representation across 27 Emerging Markets (EM) countries. |
| REITS | FTSE NAREIT Equity REIT | A free-float adjusted, market capitalization-weighted index of U.S. equity REITs. |
| Long-Term Treasuries | Bloomberg US Treasury 20+ Year | Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity. |
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www. Frontierasset.com. They include important disclosures and should be ready carefully. Frontier Asset Management is a registered investment adviser with the U.S. Securities and Exchange Commission; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information about Frontier and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov.
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Frontier’s use of external sources should in no way be considered an endorsement. Reader accesses sources at their own risk. Frontier is not responsible for any adverse outcomes from sources provided and cannot guarantee their safety. Frontier does not have a position on the contents of the site sources. Frontier does not have an affiliation with any author, company, or security noted within. Frontier reserves the right to remove these links at any time without notice. It is generally not possible to invest directly in an index. Exposure to any asset class or trading strategy or other category represented by any index is only available through third party investable instruments (if any) based on that index.
© Morningstar 2022. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.