New Year Begins with Significant Market Shifts
Hard Asset Insights has returned after a bit of a hiatus, although we have been watching the current economic and market landscape with incredible fascination. It seems to be a market of extremes. A particular industry group and asset class will trend strongly in one direction, and then undergo a sharp, even violent reversal of the trend. Correlations between various asset classes and sectors are also dramatically variable. It’s a recipe for short-term speculators to be whipsawed and even run over by these incredible swings, but it can often be a significant opportunity for investors with a longer-term approach and view.
Several trial balloons around policy size and scope were launched this week by the incoming administration. Although it certainly appears that there is a blue wave, there are likely enough moderate democrats in the Senate that the full scope of what is being proposed will be negotiated. We will be interested to see what happens in the markets when attention begins to turn to paying for such large stimulus programs, and we view this with a cautious eye for the broad market.
Superficially, this week’s market decline seems as if it was quite orderly. The S&P 500 was off 72 basis points, the Dow Jones Industrial Average was off 51 basis points, and the Nasdaq 100 was off 73 basis points. However, sector performance was an entirely different kettle of fish. There was wide dispersion between winners and losers. This is often indicative of extreme positioning by fund management groups that have been chasing winners and shedding losers to try to keep up with indexes.
We saw the sector rotation in our own hard assets portfolios. Gold, which was a stellar performer for a good part of 2020, underperformed dramatically. The yellow metal was off 58 basis points, and the related stocks were very weak. The HUI Gold Bugs Index was off 4.7 percent and the Junior Gold Index was off 6.3% for the week. Silver held up reasonably well. There is evidence that investors are seeking out this asset class as a way to play clean energy technologies. Platinum had a big week to the upside, much like some of the other more cyclical commodities.
We do not typically discuss crypto in this space, as there are arguments to be made either way as to whether it is a hard asset. However, it is an alternative currency, and was off 3.4 percent for the week.
Global Natural Resources also had a good but somewhat mixed week. Energy and related stocks in particular had a banner week. Underweight investors continue to chase this group that has outperformed the market on a year-to-date basis. Crude was up 3.8 percent, and as is typical in a crude rally, particularly off of lows, the stocks showed significant beta to the underlying commodity.
The XOP S&P Oil and Gas Exploration and Production Index was up 8.5 percent. The S&P Energy Sector was up 5.4 percent, and the Oil Services Index was up 5.3 percent. Natural gas underperformed energy broadly, off 2.2 percent. Iron ore was up 29 basis points. Copper, after having hit eight-year highs, took a bit of a breather and was off 43 basis points. Nickel was up 12 basis points. Zinc, after a healthy run in 2020, was off 4.3 percent for the week.
After underperforming for the last few weeks, defensive portfolio areas such as real estate and infrastructure performed well. Investors rotated back into these stocks as Fed Chairman Powell indicated that rates would hover at zero for the foreseeable future, and “now is not the time” to discuss a reverse of the Fed’s asset purchase program. The Dow Jones REIT Index was up 2.7 percent.
There are reports that mall traffic in the United States is beginning to pick up, and that leases in Manhattan are up 94 percent year over year. The US Infrastructure Index was up 1.7 percent, and leading that index was the Alerian MLP energy infrastructure index, which was up 6.5 percent. Underperforming the infrastructure group were the utilities. The Dow Jones Utilities Index was up only 23 basis points.
Best Regards,
David McAlvany
Chief Executive Officer
MWM LLC
