Turbulence in the Face of Uncertainty – November 13, 2020

Turbulence in the Face of Uncertainty – November 13, 2020
Morgan Lewis Posted on November 13, 2020

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

Turbulence in the Face of Uncertainty

Last week’s volatility spilled into this week as earnings season wound down. While Biden is presumed by many to be the winner of the election, there are many states that are close enough for recounts and court battles over voter eligibility. Joe Biden’s Electoral College victory is thus far technically unofficial. Where this shakes out is anyone’s guess, but we need to be prepared for a long and drawn out process.

To add to this uncertainty, it is clear that at least one and possibly two Georgia Senate seats are going to a runoff election. If the Democrats were to win both seats, the Senate would be split down the middle. Therefore, Kamala Harris would cast votes to break any ties, thereby giving the Democrats de facto control of the Senate.

This matters tremendously. In the event that Biden is officially declared the victor and the Republicans lose control of the Senate, it is likely that the Tax Cuts and Jobs Act of 2017 would be rolled back and the corporate tax rate, income tax rates, and capital gains tax rates would increase. This would be an obvious headwind for corporate earnings beyond the earnings contraction many companies have experienced due to COVID-19. A split government would likely have to result in executive orders in order to achieve political objectives. As it pertains to hard assets, there are implications to resources and infrastructure development if there were to be a change in leadership at the Environmental Protection Agency.

Overall, hard assets had a bifurcated week. Bloomberg reported this week that the largest net gold ETF, GLD, saw a net outflow, losing 504,000 ounces. Gold was off 3.9 percent for the week. The stocks were something of a mixed bag. The HUI Gold Index was off 69 basis points for the week. The GDXJ Junior Gold Index, however, underperformed and was off 3.72 percent. SLV iShares Silver Trust was up 57 basis points, and the PPLT Aberdeen Physical Platinum ETF was up 2.6 percent for the week.

Global Natural Resources had a choppy and volatile week. The S&P Global Natural Resources Index was off 29 basis points. However, there was a great deal of intraweek noise. Crude was up 7.2 percent for the week, and natural gas was up 5 percent. We did notice something of a rotation early in the week from technology stocks into energy. We are not yet convinced that this is a trend, but think the stocks could perform well around hope for a vaccine and a reopening of the global economy. Copper, on the other hand, was off 1.9 percent. Nickel was flat, and zinc was off 2.7 percent.

Real Estate had a very solid week and was up 6.8 percent. A great deal of the performance came from challenged property types such as hotels, offices, and shopping centers around optimism that a vaccine will return occupancy and traffic to more normal levels. In particular, office REITS with exposure to major urban markets outperformed dramatically. From what we are hearing on conference calls, companies are realizing to a great degree that work from home is working, and that space needs in the future will be lower. We see this as more of a trading-driven dynamic than a fundamentally based one. Many retail real estate owners are still fighting tenant bankruptcies. Some REITs have gone the route of de facto bailouts by participating in the recapitalization of their tenants. Many of these retail concepts were broken long before the days of COVID, and we question whether this strategy makes sense.

Infrastructure also had a good week. The IFRA U.S. Infrastructure Index was up 6.6 percent. Leading the way was the AMLP Alerian MLP Index, which was up 7 percent in a strong market for any stocks related to energy. S&P Utilities Index also performed well, and was up 2.8 percent for this week. Increasingly, utilities capital expenditures are going to be driven by ESG (environmental and social governance) mandates, and will increasingly shift capital toward renewable inputs.

There will be no Hard Asset Insights next week, and we look forward to resuming with you on the Friday after you have eaten your Thanksgiving turkey.

Best Regards,

David McAlvany
Chief Executive Officer

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