Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
The Big Picture Becomes Really Big
As we are beginning to wind down through the third quarter earnings season, we are digesting information, data, takeaways, and themes from the numerous reports we have read and conference calls we have listened to. Because our universe is fairly broad, we will continue to listen to conference call replays for the next several weeks as we generate ideas for the MAPS portfolios.
While all of that has been going on, we have actually begun to observe one of the more interesting weeks, from a market perspective, in a while. Generally, Hard Assets Insights is not a space where we focus on macroeconomic developments, however we think that they may potentially have significant implications for the strategy, and we think they are worth discussing. In addition to the relatively dovish Powell commentary around inflationary pressures, this week there was increased optimism that the China tariffs would be rolled back. In addition, some encouraging reports around the domestic jobs market as well as relatively benign earnings season overall has buoyed sentiment as we watched the S&P make new highs and the yield curve begin to steepen.
Normura’s Charlie McElligott has termed the recent environment “long worst-case scenario, short good news” and we saw an unwind of this very persistent trade into more “risk-on” assets this week. Gold has had its worst week in two years, finishing the week down 3.3 percent. The HUI Amex Gold Bugs index fared quite a bit worse, down 6.8 percent. The Vanguard Real Estate ETF, the VNQ, having been a stalwart on a year-to-date basis, was off 3.2 percent for the week. Utilities, another year-to-date ballast, were off 3.8 percent. On the other hand, we saw the beginnings of a rally in more cyclical natural resources companies that have struggled this year with the SPDR S&P Global Natural Resources ETF up 1.3 percent, the SPDR S&P Oil and Gas Exploration & Production ETF up 4 percent, and the Energy Select Sector SPDR Fund up 2.2 percent.
Is this the beginning of a deeper sector rotation? Have we reached an inflection point? By no means do we think that one week a trend makes, but we think this bears monitoring. However, often times, momentum begets momentum as leveraged trades blow up. I cannot think of a more crowded trade for the year 2019 than being long bonds and other defensive income instruments and short cyclicals such as energy and metals, ex gold. Additionally, it has been very easy to be overweight defense and underweight offense. Nervous portfolio managers are likely to want to book profits in front of year-end. Ultimately, we believe this could persist, and will present an exceptional opportunity to get the MAPS strategies more fully invested.
We thank you for your continued interest and support. Next week Hard Assets Insights will be published over the weekend instead of its usual Friday date.
Chief Executive Officer