Investors Move to Reduce Risk
The predominant market theme for this week was the spike in the 10-year yield and its implications for risk assets. Stepping back, as risk-free rates rise and offer cash flows with minimal risk, the opportunity cost in owning risky assets, such as stocks, becomes incrementally less attractive. As the long-term risk-free rate approaches 1.5 percent, this is close to parity with the yield of the S&P 500. In order to get higher yields from stocks in aggregate, their nominal prices must go down. Momentum begets momentum, and investors pushing the envelope by being heavily positioned in risk assets were forced to quickly unwind. This cast a damp pallor on what has thus far been a good earnings season.
Ultimately, rates are rising for reasons of economic recovery. Although one could argue that a significant economic recovery has already been priced in to risk assets, sentiment should continue to improve as market participants feel a greater impact from a great reopening. Tech was hit particularly hard this week, with the NASDAQ 100 off 3.8 percent. However, the markets were broadly hit, and the S&P 500 was off 1.7 percent and the Value Line Arithmetic Index was off 1.5 percent. Ultimately, the Federal Reserve is incented to maintain low rates for the foreseeable future, and is likely to do what is necessary to achieve such ends. This, on a macro basis, suggests a buying opportunity may be emerging.
There are significant read-throughs for rising rates and a steepening yield curve across the hard assets spectrum. Gold continues to be the worst performing metal on a year-to-date basis after a banner year in 2020. The yellow metal was off 4 percent last week, and has taken out some key levels of technical support that many traders watch. Despite a generally good earnings season and lots of dividend increases, the precious metals stocks performed even more poorly, and the GDX Gold Miners Index was off 6.6 percent. Junior gold stocks outperformed seniors marginally, and the GDXJ Junior Miners Index was off 5.5 percent. Silver had a difficult week as well, closing down 3.3 percent.
Natural resources had a mixed week as well, although outperforming the broader market. The S&P Global Natural Resources Index was off 1.3 percent. Despite a dramatic decline late in the week, oil closed up 2.4 percent and WTI remains above the $60 level despite Saudi indicating that it may gradually return the one million barrels a day it took off of the market last year to the market and normalize policy. Energy stocks, too, closed the week in the green, with the S&P Oil and Gas Exploration and Production Index up 3.1 percent and the OIH Oil Services Index up an incredible 10 percent for the week in a very challenged tape. Copper continues to push multi-year highs, and was up 9.2 percent for the week. Nickel was up 7.9 percent for the week. Iron Ore was up 94 basis points, and zinc was up 1.1 percent. The related stocks came off multi-year highs as the MSCI Global Metals and Mining Index was off 2.7 percent for the week.
Defensive sectors and stocks with above-average yields, as you might imagine, had a challenged week. The Dow Jones Equity REIT Index was off 1.2 percent. Investors continue to consider what a new normal will look like across many property types as more properties, particularly in the hotel and retail areas, enter into distressed territory. According to Bloomberg, $430 million in commercial real estate debt is coming due in 2021, and this reckoning may take time to play out. This may potentially present an incredible opportunity for property types that are more resilient. Infrastructure had a challenged week, and the IFRA US Infrastructure Index was off 1.6 percent. Utilities led to the downside, and were off 4.3 percent due to a combination of rising rates and some companies having sustained significant losses in the recent Texas power crisis. Some opportunities may present in this area, as well. Energy infrastructure performed well, and the Alerian MLP Index was up 1.4 percent.
Overall, investor positioning remains extreme, and therefore moves that unwind trends are abrupt and violent. Mitigating volatility means stepping back and considering long-term portfolio allocations and taking opportunities as they present themselves. As the Fed looks to continue to reflate the economy, asset prices follow, and this is a tailwind across many areas within hard assets.
Chief Executive Officer