Feeling More Secure, Investors Take On More Risk
As we digest our Thanksgiving turkey, we are also digesting what has become a significant
market rotation. At least some of the near-term certainty around the election outcome has been
lifted, and there are early signs of life at the end of the COVID tunnel. It is clear that we are now
beginning to gear up to distribute the first doses of a vaccine, and although many are likely to
wait until there is more data on the long-term effects of the vaccine, there are many, particularly
those in high-risk groups, who will decide that the benefits outweigh the risks around side
Despite moderating job gains and expiring aid packages, the markets climbed the “wall of
worry,” piled into risk, and to a significant extent cancelled their insurance policies. In particular,
precious metals saw quite a bit of Thanksgiving week indigestion. Broadly, the markets returned
to all-time highs this week, and the Dow broke 30,000 for the very first time. Companies that
benefit from an economic reopening performed particularly well. The S&P 500 was up 1.73
percent, the Dow Jones Industrial Average was up 1.73 percent, and leading the broader market
charge was the NASDAQ, up 2.7 percent for this week. The rally was broad-based, with the
Value Line Arithmetic Index up 4 percent for this week.
Despite dollar weakness, safe havens sold off dramatically. Gold was off 4.73 percent for the
week. The GDX Gold Miners Index was off 4.73 percent for the week as well, and the Junior
Gold Miners Index was off 4.82 percent for the week. While the liquidation on some days this
week was quite violent, it is encouraging that, for the week, the stocks did not dramatically
underperform the underlying. This is likely attributable to increasing earnings and cash flow
estimates, as well as dividend increases by many senior and intermediate producers. We applaud
this effort. However, we will be watching reserves depletion carefully. The stocks as a whole
represent significant value here, and the yields in some of the majors begin to look compelling as
their stock prices fall. Silver took on significant liquidation, and was off 7.4 percent. Platinum
held steady at up 55 basis points.
Natural Resources participated robustly in hopes of a cyclical recovery. The GNR S&P Global
Natural Resources Index was up 4.9 percent for the week. Leading the charge was the
completely unloved and heavily shorted energy sector. WTI Crude was up 9.3 percent. Energy-
related stocks, after a very challenged year, have finally begun to show signs of life around
reopening and improved demand, as well as optimism that the OPEC production cuts will be
extended. The XOP S&P Oil and Gas Exploration and Production Index was up 10.4 percent.
The OIH Oil Services Index was up 10.4 percent, and the XLE S&P Energy Sector was up 8.3
percent. Copper was up 1.6 percent for the week, nickel up 50 basis points, and zinc up 91 basis
points. COVID-19 continues to impact mine site production of many commodities. For example,
copper production was down 2.4 percent year-over-year, and this was largely driven by COVID
related restrictions (chart below).
Our more defensive sectors underperformed somewhat as investors rotated toward riskier assets.
The US Infrastructure Index was up 3 percent, and leading this sector was the AMLP Alerian
MLP Index, which was up 3.1 percent with the resolution of several court challenges to
midstream contracts by bankrupt producers. The Dow Jones Utility Index, on the other hand, was
up just 50 basis points as investors seeking torque looked for more risky assets. The Dow Jones
REIT Index was up 20 basis points. There are compelling opportunities within this area. In a
choppy economic environment, there are very few businesses and industries that have the ability
to compound returns like some of these.
Chief Executive Officer