The Markets Think Better Times Are Ahead

Financial markets remain ebullient as they make all-time new highs coming into the holiday season and year-end. Optimism around the rollout of the COVID-19 vaccine has fueled great expectations around a strong cyclical recovery. At the Federal Reserve’s final meeting of 2020, Jerome Powell made it clear that monetary policy will remain accommodative, and the bond-buying program will continue for the foreseeable future. This has continued to put pressure on the US Dollar.

Congress is working on a stimulus package, but talks continue to drag on due to difficulty reaching bipartisan agreement around the specifics of a deal. Major sticking points remain around the size of stimulus checks, as well as funding for state and local governments through the Municipal Liquidity Facility, which is set to be returned to Treasury when it expires. However, hopes remain that a bipartisan agreement can be reached and that a stimulus package is coming in the near future. Accordingly, the overall markets had a good week, largely concentrated in big tech. However, the rally was generally broad-based. The S&P 500 was up 84 basis points, the NASDAQ 100 was up 2.8 percent, and the Value Line Index was up 65 basis points.

With the weaker dollar came significant support for commodities broadly, and precious metals in particular after having tested significant technical levels in recent weeks. Gold was up 2.6 percent for the week. The precious metals stocks had a very good week. The Gold Miners Index performed well, and was up 4.6 percent for the week. Junior miners outperformed, and were up 7.2 percent for the week. Silver, too, had a very strong week, and was up 7.2 percent as well. There are conflicting ideas about what might happen with gold as a cyclical recovery gets underway. However, it seems that an accommodative Fed and monetary policy coupled with an economy bouncing off low levels may very well provide an inflationary backdrop. This is likely to be positive for gold, commodities more broadly, and the so-called “reflation trade.”

Global Natural Resources had a very good week as well. Crude was up 5.4 percent for the week around optimism that we are seeing the beginning of the end of the COVID-19 crisis. The hope is that we could continue to see inventory draws as demand recovers. Further, although there have been some incremental rig adds over the last few weeks, producer budget cuts are generally thematic. This is a significant tailwind with regard to supply going forward. Natural gas was strong as well due to cold weather-based demand and a significant storm in the Northeast, with more possibly on the way.

Energy stocks, however, had a tough week. The XOP S&P Oil and Gas Exploration and Production Index was off 6.4 percent for the week. The XLE S&P Energy Sector Index was off 4.2 percent, and the OIH Oil Services Index was off 3 percent. It is likely that, coming into year-end, much of the selling we are seeing is related to harvesting tax losses.

Industrial commodities were generally quite strong for the week. Copper reached multi-year highs, kissing $8,000 a ton, and was up 2 percent for the week. Nickel was up 1.9 percent; zinc, 1.3 percent; aluminum, 1.8 percent; and platinum, 1.1 percent. This very broad-based commodity rally is indicative of a weaker dollar tailwind rather than more individual commodity-specific supply/demand dynamics.

Less cyclical defensive stocks, such as real estate and infrastructure-related companies, underperformed for the week in a continued rotation into stocks more levered to a cyclical recovery. The Dow Jones REIT Index was off 1.2 percent for the week. Many earnings calls across a multitude of industries indicate that there will be an ongoing shedding of office space, shutting down branches or retail locations, and renegotiation of rents. Many areas within real estate face significant challenges. However, we see pockets of value emerging.

Infrastructure was a bit of a mixed bag. The Alerian MLP Index had a difficult week, and traded much in line with energy stocks, off 5.1 percent for the week. On the other hand, the Dow Jones Utilities average was up 62 basis points. It will be interesting to see how President Biden’s FERC appointees begin to reassess energy policy on issues such as renewables, the electric power generation industry, and metrics around base ROE incentives and cost recovery calculations.

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC