November 17, 2022

Investing Environment Review and Outlook – Volume 65

Data Overload
Market volatility in the last two weeks has been unusually confusing and exhausting for most investors. For
those who have lost track, the S&P 500 declined 2.5% on 11/2 after the Fed raised rates 0.75% to 4% and
promised more to come. Mid-term election results surprised the media on 11/8, then a day later there was
a 2.1% decline on contagion fears as the crypto exchange FTX collapsed along with coin prices. On 11/10 the
S&P 500 rallied 5.5% after a weaker than expected inflation report and lower long-term interest rates. As a
result, investor positioning remains near extreme lows with all 10 investors groups below their norm. The
biggest surprise - the S&P 500 is up 14% from the 10/13 low to the close on 11/11, a 99th percentile move
since 1950.

Last month we discussed the likely Q4 turning point in the 10-year yield, inflation and equities amid the
investor gloom. Conditions remain bullish for equities despite the Fed’s rhetoric. The 10-year yield has held
the 10/21 peak of 4.3% and even declined 0.5% to 3.8% as of 11/10. However, our research is now less
clear on the next big move in rates from here. The October CPI report at 7.7% continued to follow the 5
prior similar inflation peaks since 1950, confirming the June inflation peak of 9.1% was likely a turning point.

Beyond the inflation turn and interest rate peak, one of the most important signals of the year is the
recent Dollar Index reversal. This month we discuss the investment implications.

We increased U.S., foreign-developed, and emerging markets equities to a bullish 5 rating. We cut long-
term bonds back to a neutral 3. Gold remains a bullish 5 and we raised commodities to a bullish 5 rating as
well.

6 Fed Hikes vs. Dollar: Possible Trend Change

2022
114
Dollar
112 Index
11/14/2022
110 Fed Hikes 106.957

108

106

104

102

100

98

96

94

92
4.50

4.00
10 Yr Yield 11/14/2022
3.50 3.85

3.00

2.50 Fed Funds

Rate
2.00

1.50

1.00

0.50

0.00
Oct-21

Oct-22
Feb-22

Apr-22

Sep-22

Feb-23
Dec-21

Dec-22
Mar-22
Nov-21

Aug-22

Nov-22
May-22

Jul-22
Jan-22

Jan-23
Jun-22

This review and outlook report by Brenton Point Wealth Advisors LLC represents our views and beliefs regarding the current market outlook. Please also read
the important disclosures at the end of this report.
 November 17, 2022

Dollar Inflection Point: Bullish for Emerging Markets

The 7.4% Dollar Index decline from the September peak could mark a trend change in the dollar. It is the
biggest counter trend move since 2020. After a 27% move higher in the last two years, the rubber band is
stretched as it pushed emerging markets down 35% from their 2021 peak, resulting in low investor
positioning and valuations, with a price earnings ratio of just 9.5. During the last two dollar declines in 2017
and 2020, the MSCI Emerging Markets Index rallied 50% and 85% respectively. With such significant upside
potential, we moved the emerging markets rating to a max bullish 5.

Falling Dollar Bullish for Emerging Markets

1,400
MSCI Emerging 11/11/2022
Market Stocks Index 935.73

+85%

+50%

700
115

110
11/11/2022
106.42
105
Dollar Index

100

95

90

85
2015

2016

2017

2018

2019

2020

2021

2022

2023

2024
 November 17, 2022

Weak Dollar: Bullish for Foreign-Developed Markets

Foreign-developed markets will benefit from a weaker dollar, as well. Although there were other issues like
slower earnings growth for foreign companies, since 2011 the MSCI EAFE Index (Europe, Asia and Far East)
of developed countries returned a surprising 0% while the S&P 500 was up 250% over the same period, or
12% annualized. An incredible difference. Over that same period, the Dollar Index rallied over 50%.
Contrast that to 2003 to 2007 when the EAFE index of foreign equities rallied 184%, over 2x the S&P 500 up
just 71%. In that case the Dollar Index declined 30% from 2002 to 2005. The incredibly weak performance
of foreign equities means they are under owned by institutions, and undervalued as well at a recent 11.5x
earnings vs. 17.5x for the S&P 500, a 35% discount. As recently as 2016, EAFE valuations traded at a
premium to the S&P 500. For the potential upside, we increased foreign-developed equities to a max
bullish 5 rating in what could be a multi-year outperformance of the group.

11 Years of Weak Foreign Equity Performance:

=Undervalued and Underowned
4,000

4 Years
+184% 11 Years 11/11/2022
0% 1918.4
EAFE Index
2,000
Foreign Developed Equities Index

1,000

500
120

11/11/2022
11 Year Bull 106.29
110 Market

Dollar Index
100

90

80
-30%
70
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
 November 17, 2022

Dollar Reversal Bullish for Industrial Commodities

Industrial commodity prices have a strong negative correlation to the dollar, as well. Since 1970, the CRB
Industrials Index returned 8.9% when the dollar was falling vs. -1.5% when it was rising. In periods when
the dollar was falling and the Fed was hiking rates as they are today, the CRB Industrials returned 18.5%, 5x
the norm since 1970. Despite a 60% rally in 2020 and 2021, after a 20% decline this year, the CRB
Industrials Index is still below where it was in 2011. Commodities could also be set for a multi-year positive
performance like 1975-80 (85%) or 2003-2007 when the index rallied 152%. We raised commodities to a
max bullish 5 rating this month.

Weak Dollar Bullish for Industrial Commodities

CRB Industrials 11/14/2022

600 Commodity Index 570.17

300
120

110 11/14/2022
Dollar Index 106.66

100

90

80

70
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024
 November 17, 2022

Inflation Lower: Doom Loop Reversed

Lower inflation ahead is consensus opinion after last week’s October CPI surprised to the downside. Other
leading inflation indicators are pointing to the downside as well. For instance, the FAO Food Price Index
slowed to just 2% Y/Y and China’s October Producer Price Index was -1.3% Y/Y. Since the June CPI peak at
9.1%, inflation has followed the norm from the 5 prior inflation peaks. Also, for the next 5 months the
comps from a year prior (when the supply chain bottlenecks hit) are high, making it easier for the Y/Y rate
to decline. It is the convergence of the expected inflation rate and the expected Fed Funds rate that is
driving the equity rally, since convergence supports a Fed hiking taper and a pause by May.

2022 CPI Decline In Line with Prior Inflation Peaks

5 Prior Cases 1951/1970/1974/1980/1990
10 --- Peak 9.1%
6/30/22
Average
10/31/2022
2022
9 7.7

1970
8
1990
7

6
1974
5

4
1980

3
1951

1
Prior cases adjusted
2022 Peak
0
Jan-20 Jan-21 Jan-22 Jan-23 Jan-24
 November 17, 2022

High CPI Comps next 5 Months

= Lower CPI Y/Y Ahead
1.5% Ukraine
Supply Chain 1.3%

CPI Bottlenecks: 1.2%

M/M HIGH COMPS
Reopening
Post Surge 1.0%
1.0% COVID
0.9% 0.9%
Reversion 0.8%
0.7% 0.7%
0.6%
0.6% 0.6% Crude
0.6% down
0.5% 30%
0.5%
0.5% 0.4% 0.5%
0.4% 0.4%
0.4% 0.3% 0.3%
0.2%
0.2% 0.2% 0.2%
0.2%
0.2% 0.2%
0.1% 0.1%
0.1% 0.1%

0.0%
0.0%

-0.2% COMPS MATH: If this year's monthly Comps Next 5

gain is less than last year, then the Y/Y Months
-0.3%
rate falls. Higher comps start in Oct. Average 0.8%
-0.5%

COVID -0.7% High

Lockdown Comps

-1.0%
Oct-19

Oct-20

Oct-21

Oct-22
Feb-20
Apr-20

Sep-20

Feb-21
Apr-21

Sep-21

Feb-22
Apr-22

Sep-22

Feb-23
Apr-23
Dec-19

Dec-20

Dec-21

Dec-22
Mar-20

Mar-21

Mar-22

Mar-23
Nov-19

Aug-20

Nov-20

Aug-21

Nov-21

Aug-22

Nov-22
May-20

May-21

May-22

May-23
Jul-20

Jul-21

Jul-22

Jul-23
Jan-20

Jan-21

Jan-22

Jan-23
Jun-20

Jun-21

Jun-22

Jun-23
 November 17, 2022

Food Price Inflation Reversing

10.0 200%
9.0 190%
8.0 180%

7.0 170%
U.S. CPI Y/Y
160%
6.0 Markers: FAO Index > 20% Y/Y Oct 7.7%
150%
5.0
140%
4.0
130%
3.0
120%
2.0 110%
1.0 100%
0.0 90%
-1.0 80%
-2.0 70%
Oct-22
-3.0 60%
2.0%
-4.0 50%
FAO Food Price Index 40%
-5.0 Y/Y
30%
-6.0
20%
-7.0
10%
-8.0
0%
-9.0 -10%
-10.0 -20%
-11.0 -30%
-12.0 -40%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
 November 17, 2022
Presidential Cycle: Bullish through June

The midterm elections were potentially a positive for equities. Historically the S&P 500 returned 16.5% annualized
when the president was a Democrat with a split House and Senate, the combination for the next two years. That’s up
from an 11.7% historical return when all three were controlled by Democrats like the last two years. The only prior
years of this split combination were 2011-2014 under Obama as president with House and Senate split. Interesting
that it is not gridlock itself that is bullish as is assumed, since the opposite scenario, when Republicans control the
presidency and the House or Senate is split, resulted in below average S&P 500 returns.

Regardless of the political combination, the period October of the 2nd year (2022) through June of the 3rd year (2023) is
the most positive of the 4-year presidential cycle. The first quarter average historically was 8.3%, the highest of any
quarter.

Mid Term Election Result Bullish for S&P 500

S&P 500 Returns 1950-2022
20.0
19.0 S&P 500
Return 17.7
18.0
17.0 16.5
16.0 15.5
15.0
14.0
13.0
12.0 11.7
11.0
10.0
9.0 Market Norm: 11.1%
8.0
7.0 7.8
7.3
6.0
5.0 % Time
D Democrat S Split R Republican
4.0 26 7 11 32 14 10
3.0
D Pres/D Congress D Pres/ S Congress D Pres/ R Congress R Pres/ D Congress R Pres/ S Congress R Pres/ R Congress

Q4/Q1/Q2 After Midterm Elections Best Period for S&P 500

Average S&P 500 Returns by Quarter 1950-2021
10.0%
YEAR 2 YEAR 3
Average S&P 500 (2022) 8.3%
Returns by Quarter (2023)
8.0% 7.6%
1950-2021

6.0% 5.7%
Q4 of 2nd Year of
4.6% Presidential Cycle 4.4%
3.8% (Oct-Dec 2022)
4.0% 3.6% 3.4%
2.3%
1.8%
2.0% 1.1% 1.4% 1.4%
0.9% 1.0%

0.0%
YEAR 1 YEAR 4
-2.0% -1.2%
Yr1Q1
Yr1Q2
Yr1Q3
Yr1Q4
Yr2Q1
Yr2Q2
Yr2Q3
Yr2Q4
Yr3Q1
Yr3Q2
Yr3Q3
Yr3Q4
Yr4Q1
Yr4Q2
Yr4Q3
Yr4Q4
 November 17, 2022

Summary

This month we focused on the dollar inflection point after a 2-year move higher. The implications are
significant for upside potential in emerging markets, foreign-developed equities and particularly industrial
commodities, due to low valuations and low investor positioning. The next big move in the dollar is
unknowable, but for now the trend is down and conditions bullish for those assets. Investor consensus now
sees lower inflation ahead, which means less pressure on the Fed for further hikes. With European rates
below U.S. rates and inflation higher in Europe, there is a viable scenario the ECB will play catch-up, putting
further pressure on the dollar. The S&P 500 14% rally in just a month is unsustainable, but conditions
remain bullish and investor positioning remains below the norm for all 10 investor groups we follow, a
strong wall of worry. We will continue to monitor our indicators on a daily basis for any significant change
to our outlook. Thank you for your support and please contact us with any questions.

Michael Schaus
Director of Market Research