Market Commentary — February 27, 2023

Stocks suffered their biggest decline in 10 weeks thanks to a cascade of upside inflation and growth news surprises. Inflation appeared to regain momentum in January, as the personal consumption expenditures (PCE) price index jumped 0.6% and December’s figure was also revised higher.

The PCE measure, ex-food, and energy, widely considered to be the Federal Reserve’s preferred inflation gauge, rose from 4.6% to 4.7%, the first pickup in pace since September. Consensus expectations had been for another decline to around 4.3%. Personal spending also rose 1.8% in January, the biggest increase in nearly two years and well above expectations.

The big takeaway is that consumers and employers have not been deterred by higher interest rates. The University of Michigan’s gauge of consumer expectations in February was revised higher to its best level in over a year and both initial and continuing jobless claims fell back and came in below consensus.

All of this good news is bad news for investors hoping for an end to the Fed tightening cycle. CME futures are now pricing in a 27% chance of a 50 bps hike in March. The 10-year Treasury is back up near 4% for the first time since November.

So what’s going on in ETF land?

Morgan Stanley may have entered the ETF space, but asset flows are not going into their Calvert ESG ETFs, at least yet. Active ETFs have taken in 36% of the net flows this year thanks to new big players like DFA and Capital Group, but global passive assets under management are still on pace to pass up active assets in the next few months, potentially in March or April. That would be a pretty big symbolic milestone!

Oral arguments will begin on March 7th in Grayscale’s lawsuit against the SEC to convert GBTC into a spot bitcoin ETF. GBTC’s discount to NAV stands at 48%, the highest margin since the fund’s debut in 2013. GBTC owns 3.5% of the world’s bitcoin and has traded at a premium to NAV for much of its existence, but it has a six-month lockup of intial investment so it cannot easily add or remove shares to deal with inflows and outflows.

Roundhill will be coming out with its BIG ETF launches, highly concentrated ETFs focused on the biggest market cap names in specific sectors like Tech, Airlines, Defense, Banks, Oil, and Railroads using swaps for exposure. Big ETFs are single-stock ETFs on steroids. David Mazza, formerly with Direxion, is now leading Roundhill’s ETF strategy.

Vanguard’s patent on a hybrid ETF mutual fund structure is set to expire in May. Australia-based PGIA has filed to add an ETF class to its mutual funds. It will be interesting to see who else follows suit if the SEC approves the move.

We are almost done with February. Will March come in like a lion or a lamb? The Fed meeting is not until March 21-22.

Jane Edmondson
CEO and Co-Founder

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