Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
The Worm Begins to Turn for Unloved Sectors
The “Santa Claus” rally appears to be upon us as we roll into the holidays and year-end. Today we saw much-better-than-anticipated jobs and wage growth numbers for the month of November, and the broader market and yields are all higher. Although surprising to most professional economists, we would point out that many of the gains in manufacturing employment were based on General Motors workers returning to work post-strike rather than organic job growth. However, the market has interpreted the news favorably as a perfect “Goldilocks” scenario of low inflation, moderate wage growth, and high unemployment. We have even heard CNBC say that the “Phillips Curve is dead.” Not being Keynesians ourselves, we find this quite refreshing.
Importantly for the MAPS strategies, we are beginning to observe very early signs of a rotation, or, at a minimum, a nascent pick-up in the relative performance of things that have not been working well. Energy, in particular, is of particular interest to us given how unloved and undervalued the sector is as a whole. For the first time in a while, the sector outperformed the broader market. This week, OPEC met in Vienna. Although the meetings started in a big cloud of uncertainty, ultimately, a half-million-barrel-a-day cut was agreed upon. That brings the total cuts to 1.7 million barrels per day.
It seems that OPEC has demonstrated clear commitment to drawing down global inventories and curbing oversupply. Saudi in particular was motivated to prop up oil prices given the setbacks that the Kingdom has had in achieving its “Vision 2030” objectives. The $25.6 billion-dollar Saudi Aramco IPO this week valued the company at over $1.7 trillion dollars. Although successful on the surface, it was placed largely with local Gulf Arab monarchies and local and regional investors. Coupled with capital discipline on the part of US shale producers, who continue to drop rigs, we think this OPEC commitment paints a favorable backdrop coming into the year 2020. We are encouraged to see that the group saw some real wholesale fundamental buying in quality companies, and not just short covering in more distressed concerns.
Another area where we see value that has struggled on a year-to-date basis but is starting to see signs of life is industrial/base metals. “Doctor Copper” is approaching one-month highs as inventories are beginning to draw, and attention begins to turn away from the push/pull of China trade talks and more toward the fundamentals for the commodity itself. Unfortunately, this fledgling rotation has come at the expense of gold and gold stocks. We saw a bit of a pullback this week despite continued mergers and acquisitions activity and industry consolidation.
Our more stable value portions of the portfolio performed well, but underperformed the market due to this rotation and upward pressure on yields. We will welcome an opportunity to get incrementally more invested in this area. We also see consolidation opportunities in the REIT area as yield-hungry foreign capital continues to drive capitalization rates lower and valuations higher, although these effects vary by property sector.
Ultimately, these crosscurrents are why we believe a measured and balanced approach to portfolio construction is warranted, although market rotations present opportunities for us to build out portfolios. We thank you for your continued interest and support.
Best Regards,
David McAlvany
Chief Executive Officer
MWM LLC
