The Market Considers Its Options

The broader market had a bit of a pullback as it digested extraordinary gains. However, the selloff was uneven. There are plenty of signs that the risk-on environment we have experienced since the COVID-19 lows continues its uptrend, albeit within a sector rotation. Specifically, the boom in cyclical commodities shows little sign of abating.

This leaves one to wonder whether or not inflation is around the corner, and may very well throw cold water on the rally. Still, the rally, like the US economy, has proven quite resilient. It is true that a higher risk-free rate makes stocks relatively less attractive, or, at a minimum, increases the discount rate one uses to discount future cash flow. This is not to suggest that valuations suddenly matter in this market environment, but it is worth paying attention to.

Gold continues to act poorly, and, in fact, continues to be the worst performing commodity on a year-to-date basis. There are numerous explanations for this lagging performance. Some believe that the meteoric rise in cryptocurrencies has taken market and mind share away from gold. Others might explain it as investors favoring risk over safe havens. Perhaps, however, gold is simply digesting last year’s exceptional gains and is taking a bit of a breather. For the week, the yellow metal was down 1.9 percent.

Despite relatively robust earnings and dividend increases for several of the major producers, the stocks underperformed bullion. The GDX Gold Miners Index was off 5.1 percent. Junior stocks did slightly better, but were still off 4.2 percent. It is troubling to see the stocks underperform given a positive fundamental backdrop. That said, we are beginning to notice some signs of cost inflation even outside of necessary accommodations for COVID, and this is going to be something to watch going forward. Silver performed better, and was up 52 basis points for the week.

Other commodities had much better performance. Oil closed the week down 39 basis points after a great deal of volatility. OPEC indicated this week that, while this is a year of recovery for the market, a great deal of uncertainty remains. They accordingly cut their demand forecast for 2021. Additionally, the International Energy Agency said that while inventories have been drawn down, the market is still oversupplied.

Oil stocks nevertheless continue to perform well, dominated by performance in natural gas-weighted names due to Arctic temps across much of North America. The S&P Oil and Gas Exploration and Production Index was up 2.6 percent, and the OIH Oil Services Index was up 3.8 percent. Henry Hub natural gas closed off a volatile week up 5.5 percent. However, basis differentials across different areas were all over the place.

Metals outside of gold continued strong performance. Doctor Copper traded above $4.00 a pound, and is at a nearly 9-year high. Iron ore closed the week up 2.8 percent, zinc up 1.6 percent, and nickel up 3.3 percent. Platinum continues an impressive run, and was up another 4.3 percent.

Despite some early concerns around the homebuilders due to the rising 10-year, lumber closed up 83 basis points.

Interest rate defensive sectors were a mixed bag, performance-wise. Real estate had a relatively challenged week on the back of the rising 10-year yield, which has bounced off historic lows. The Dow Jones REIT Index was off 51 basis points.

Somewhat yield-sensitive infrastructure had a good week. The AMZ Alerian MLP energy infrastructure index was up 94 basis points. Freezing temps in the south led to increased energy demand and consumption.

In Texas, it was learned that the grid infrastructure was simply not set up for sustained sub-zero temperatures. Despite efforts to make it a partisan debate, the truth was more nuanced. There were a multitude of failures that led to the blackouts all across the state. For a succinct and non-partisan analysis of the data and the situation, this link will take you to a great resource that we encourage you to read: The Texas Blackout: All You Need to Know.

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC