The Markets Grow Hopeful

As optimism grows around the rapid approval and distribution of a COVID-19 vaccine, the markets grow increasingly confident. They continue to climb the proverbial “wall of worry” despite mixed to weak economic data. The S&P 500 was up 88 basis points, and the Dow Jones Industrial Average was up 83 basis points. Despite the growth in COVID cases globally, it is clear that the financial markets are willing to look past lockdowns that it perceives as temporary, toward an economic recovery. Renewed hope around a stimulus package provided additional ebullience. However, the results of the Georgia run-off will have a tremendous impact on what can be accomplished via legislation. 

Global Natural Resources had a very good week as cyclicals continue to be part of the investor playbook around an economic recovery. In recent weeks, precious metals have been underperforming in a risk-on environment. However, this week, generally speaking, precious metals performed well despite a risk-on environment – much like the reflation environment in the mid-2000s where a weakening dollar was a massive tailwind for gold prices. This perhaps can be attributed to renewed optimism regarding the ability to pass a bipartisan stimulus package, and the necessity of monetizing whatever debt is necessary to fund it. Gold was up 2.7 percent for the week. The stocks performed exceedingly well, with the Amex HUI Gold Bugs Index up 4.5 percent and the GDXJ Junior Gold Stock index up 5 percent. Silver bucked the precious metals trend, did not perform at all with the reflation trade, and underperformed quite dramatically, off 6.1 percent. Platinum was up an incredible 10.4 percent.

Global Natural Resources had a very good week. The S&P Global Natural Resources Index was up 4.5 percent. Oil prices continued to trade in the mid-40s area, and were up one percent for the week. This, despite OPEC agreeing to start increasing production by 500,000 barrels a day and reversing their cuts, which were bearish developments not within market expectations.

Resource stocks continue to see incredible short covering. The XOP S&P Oil and Gas Exploration and Production Index was up 6.5 percent, and the Oil Service Index was up 10.1 percent. Industrial commodities were strong, as well. Doctor Copper hit a seven-year high, up 82 basis points. In addition to optimism around a global recovery, we note short-term issues that have constrained mine site supply. Nickel was up 55 basis points for the week, iron ore up 82 basis points, and zinc up 81 basis points. Natural gas was up 1.6 percent. The rally in commodities is broad and orderly as a general rule.

Real estate had a solid week. The Dow Jones REIT Index was up 1.5 percent. Retail real estate continues to face significant retailer bankruptcies. In addition, although a COVID-19 vaccine will help to facilitate a return to office environments and be supportive of retail traffic, it is fair to say that a return to “normal” may take years. The way we use real estate may be permanently altered. In conversations with management teams, it is clear that work from home is working better than had been anticipated, and remote work, at least part-time, is here to stay. Online retail was a growing trend prior to the pandemic, and this is poised to continue.

Leading the charge in infrastructure were energy midstream and transportation stocks. The AMZ Alerian MLP Index was up 9.3 percent for this week, and this under-loved sector represents compelling value as companies focus on returns, deleveraging, and buybacks rather than growth. Infrastructure more broadly, as represented by the U.S. Infrastructure Index, was up 2.1 percent. Even defensive utilities participated in a risk-on environment, up 1.6 percent for the week.

In general, the environment, given the risks, calls for a judicious and rigorous approach to stock selection. We see tremendous pockets of value in a nascent cyclical recovery, however we are cautious given the risks around the earnings-related damage that is likely to impact areas of the economy for years to come.

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC