Weekly Hard Assets Insights
By David McAlvany
Earnings season was in full swing for the week ended July 31, 2020. 40 percent of the market cap of the NASDAQ reported after the market close on Thursday. There were significant earnings beats on the part of big technology companies. Congressional hearings where big tech was challenged on the potential anti-competitive or even monopolistic nature of their business models was largely shrugged off by the market. Despite somewhat of a “sell the news” reaction in the broader market, one cannot ignore the operational and financial resilience of these companies, particularly in light of global economic conditions. For these companies, earnings growth and profit margins remain robust despite the pandemic.
Turning to hard assets, precious metals once again had a very strong week. Gold was up 3.8 percent and made a new intraday all-time high at $2005.40 per ounce to end a very strong month. The stocks underperformed bullion marginally as the gold price begins to catch up with expectations imbedded with the stocks. The NYSE Arca Gold BUGS Index was up 2.7 percent and the GDXJ Junior Gold Miners ETF was up 2.2 percent. Broadly, valuations are somewhat extended, however, earnings always seem to present unique situations and opportunities. There has been a flurry of financings by junior gold companies, many of whom have been starved of capital for years as they seek to top up their treasuries and move projects forward. Silver had a particularly big week and was up 6.8 percent.
Global Natural Resources did not fare as well and was something of a mixed bag. The GNR S&P Global Natural Resources Index was lower by 1.6 percent. Energy stocks were hit particularly hard by a combination of soft energy prices and sobering outlooks for the business going forward. The XOP S&P Oil and Gas Exploration and Production Index was off 2.8 percent, the XLE Energy Select SPDR was off 4 percent and the OIH Oil Services Index was off 5.4 percent. Base metals were also mixed. LME Copper was off 1.1 percent, Nickel was up 77 basis points, Aluminum was up 44 basis points and Iron Ore was off 89 basis points.
Real estate also had a very strong week despite the medium term headwinds and challenges that certain property types are facing, particularly strip centers, malls, hotels, offices and triple-net. The MSCI REIT Index was up 4.9 percent for the week. The volume of deals within the sector has dropped dramatically and there is not a great deal of visibility around where cap rates will ultimately shake out for many of these property types. The significant level of fiscal stimulus has masked the problems in the sector in the short run and therefore signs of real distress in some of these areas will take time to become apparent.
Infrastructure was off 66 basis points, primarily driven by energy infrastructure. The Alerian MLP Index was off 1 percent as many companies within the midstream sector gave muted outlooks for the business environment due to the uncertainty around COVID-19 as well as due to continued challenges on the regulatory and permitting front. Volumes due to weak demand continue to be impacted negatively. On the other hand, the more defensive utilities area fared well with the Dow Jones Utilities Average was up 61 basis points.
We continue to digest the company and industry specific developments as this earnings season unfolds and will share additional insights as themes emerge.