Plus ça Change, Plus C’est la Même Chose – January 31, 2020

Plus ça Change, Plus C’est la Même Chose – January 31, 2020
Morgan Lewis Posted on January 31, 2020

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

Plus ça Change, Plus C’est la Même Chose

Flexing our French muscles today, the title means “the more things change, the more they stay the same.” The Coronavirus (nCov) has dealt the market a very unanticipated curve ball and has introduced some relatively minor volatility into a seemingly one directional market environment. With over 10,000 cases now confirmed worldwide, the market is pricing in some degree of global economic slowdown. Yesterday, the World Health Organization (WHO) declared nCov to be a global emergency. We saw the 3rd inversion of the yield curve since October. That said, earnings season this week, particularly from big tech, generated some optimism around the ability of the fundamental drivers for those companies to continue their upward momentum. As we comb through the data, we note that, in some cases, accounting vagaries rather than economic realities drove a great deal of the earnings upside. However, that is a story for another day.

Predictably, global natural resources were for sale given the potential for weakening demand in the world’s 2nd largest economy. Liquidation was particularly acute in the energy patch as fears about hydrocarbon demand weighed on pricing. It is believed that the market impact will be somewhere on the order of 200,000 barrels in demand a day removed from the market. For the week, the XLE Energy Select SPDR Fund was down 5.62 percent, the XOP SPDR S&P Oil & Gas Exploration & Production was down 6.25 percent, and the OIH was down 6.36 percent. While we are quite cautious, given that China is the center of incremental demand for crude, we note that the Algerian Energy minister has publicly stated that the March OPEC meeting may well be moved up to February, so there may be a more rapid than anticipated supply response. Copper did not fare much better, closing the week down 5.62 percent. Nickel gave up 2.6 percent. Even palladium, which has had a stellar 17.6 percent move year-to-date gave back 5.71 percent for the week. The SPDR S&P Global Natural Resources Index, a diversified index of base metals, bulk metals, forestry, and energy was off 4.6 percent, highlighting fears of a global slowdown.

Gold was the lone standout from a performance perspective, closing the week up 91 basis points. The HUI NYSE Arca Gold Bugs Index was down 84 bps, and the Van Eck Junior Gold Miners were down 60bps. We are quick to point out that the HUI is a capitalization-weighted index. Our observation was that there have been winners and losers as they pertain to the gold stocks, and there is some fear about large index components doing transformative M&A.

Defensive areas such as infrastructure and real estate were off, but fared a bit better than the S&P. The VNQ Vanguard Real Estate ETF was off 1.6 percent, and the ProShares Global Infrastructure ETF was off 1.6 percent. While the nCoV is likely to impact mall traffic at the margin as people avoid public areas, we think the much bigger overhang for that particular subsector is likely to be a continued move from brick and mortar to online shopping, and the resulting store closures and retail bankruptcies.

Exogenous events can often inspire fear, and we can see that manifesting in a global sell-off of risk assets and the yield curve inversion. Sometimes that fear can result in global risk-off contagion. However, history tells us that more often than not they are merely a respite from overbought market conditions – particularly one that is to a large degree driven by global Central Bank liquidity. An inverted yield curve sometimes, but not always, is predictive of a recession. Further, there are many companies for which exogenous events present little to no lasting impact on their business, and thus far we are not hearing it on the quarterly conference calls and in 2020 business outlooks. Therein lies the opportunity for the long-term and patient investor.

Best Regards,

David McAlvany
Chief Executive Officer

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