Another Rough Week Yields Mixed Results – September 11, 2020

Another Rough Week Yields Mixed Results – September 11, 2020
Morgan Lewis Posted on September 11, 2020

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Another Rough Week Yields Mixed Results

The market pullback has continued into this week as investors begin to digest the lasting impact of the COVID-19 crisis and how challenging a full economic recovery will ultimately be. There is very mixed news on vaccines, and although policymakers are doing their best to remain optimistic for a speedy resolution to the pandemic, drug companies must also remain squarely focused on safety. 

Additionally, hopes for fiscal stimulus have been dashed for the time being. The bill to provide additional unemployment insurance benefits, as well as an extension of aid for small business, has died in the Senate. The negotiations remain deadlocked, and worries about continued better-than-expected consumer spending have manifested in declining stock prices. Technology stocks, having been the ballast since the March lows, underperformed dramatically. The Nasdaq 100 was off 4.6 percent for the week. 

The Dow is once again down for the year. It seems plausible that there may be some early signs of a return of volatility and a reversal in momentum, but, so far, the pullback is orderly. Ultimately, a pullback is a healthy occurrence in what has been a melt-up stock market since March.

It was something of a mixed bag for the precious metals sector. Gold was up 45 basis points, while silver was off 64 basis points. Platinum, performed quite well, and was up 2.7 percent. This week, the World Platinum Council indicated that mined supply of the white metal was off an incredible 35 percent from April to June because of smelter outages and COVID-19 mine closures. The report indicated that the market will now have a supply deficit, even with contracting demand. 

Precious metals stocks, too, were a mixed bag. The Amex HUI Gold Bugs index was up 73 basis points, while the Junior Gold Mining ETF was off 31 basis points. Overall, the performance in the precious metals and related stocks was quite encouraging in somewhat of a risk-off market environment as they digest the incredible gains of the last few months.

Unsurprisingly, natural resources had a poor week. The S&P Global Natural Resources Index was off 1.7 percent. Equally unsurprising, energy performed badly. The S&P Exploration and Production ETF was off 10.1 percent for the week, the S&P Energy Sector was off 6.5 percent, and the Oil Services Index was off 10.6 percent as concerns around global demand took hold. 

The end of the summer driving season is now upon us, and, despite the best efforts of OPEC+, the market has not tightened as quickly as expected. In fact, Russia’s central bank indicated that oil prices could head back to $25 in its most recent scenario analysis for 2021 to 2023. This is likely to keep OPEC+ production cuts higher for longer. It is fair to say that the general rise in commodity prices shows how weak the near-term picture is for crude oil. However, commodities are cyclical. Lack of investment today will show up in higher prices in the future. 

Doctor Copper held up reasonably well – off only 62 basis points. Nickel was off 3 percent, aluminum up 17 basis points, and zinc off 2.7 percent.

Infrastructure was a mixed bag as well. While utilities were relatively defensive, energy infrastructure was hit hard with the rest of the energy complex. The US Infrastructure ETF was off 2.8 percent, utilities were off 87 basis points, and the AMLP Alerian MLP Index was off 4.4 percent. We continue to think there are some interesting opportunities to find defensive, stable income with secure dividends in this area, and we see some value in the space.

Real estate did not fare particularly well this week, with the Dow Jones Equity REIT Total Return Index off 1.7 percent. Conditions in many subsectors of real estate are deteriorating as stimulus money runs out and businesses are forced to make the difficult decision to reduce their physical footprint. Although rent collections for publicly traded REITs remain robust, the market is looking ahead to additional rationalization by businesses such as retail, restaurants, and offices. That said, most REIT management teams know the real estate cycle has been greatly extended. They have exercised balance sheet prudence, which will help them weather this storm. Additionally, many took advantage of the rally to raise additional equity, giving them a liquidity cushion.

Ultimately, the COVID-19 crisis will resolve itself and the world will see its way clear, perhaps toward a new normal. It is therefore hard to look at the past two weeks as anything but a healthy correction in an extended and even wild market environment. It is the timing of normalization that remains uncertain. The longer the crisis drags on, the longer the economic damage will last and the more stimulus will be required. The markets will continue to look to the Fed to do whatever it takes to stave off an economic and financial collapse, as well as hope for further developments on the fiscal stimulus front. This paints a very favorable backdrop for hard assets investing.

Best Regards,

David McAlvany
Chief Executive Officer

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