In a Nutshell: Stocks rallied across the globe, while bonds sold off on rising interest rates. Many of the most beaten down investment sectors had their best month of the year.
Domestic Equity: Stocks Jump, Eye Economic Recovery
U.S. stocks enjoyed a great month, following the news of effective vaccine results from multiple pharmaceutical companies. The economic recovery narrative from day one was that in order for the economy to open back up and function like it did pre-COVID an effective vaccine would need to be made available. As a result, the more economically sensitive sectors (energy, financials) that still are still deep in the red for the year had explosive moves higher, dramatically outperforming the sectors (technology) that led us out of the depths this past March.
We touched on this possible shift out of tech stocks last month with our chart of the technology sector against the industrial sector. That move continues to play out in the chart below. A clean, sustained break below the horizontal line would indicate a changing of the guard and that the rotation into more cyclical sectors is the market’s preference.
Speaking of technology, the tech-heavy Nasdaq index continues to flirt with uncharted territory. Below is the channel the Nasdaq has traded within since 2009. We are now above that range, having been there for the better part of the last five months. With numerous sentiment indicators now showing that investors are extremely optimistic, this move above the channel could be sustained for a while longer. If that optimism retreats or if the rotation out of technology intensifies, mean reversion back to the center of the long-term channel is possible.
The Federal Reserve met in November and left short-term interest rates unchanged at 0%. The Fed indicated they have no desire to raise rates anytime soon and continued to put pressure on Congress to pursue fiscal spending in order to continue economic recovery out of the COVID-19 shutdown.
Global Equity: Breakout to All Time Highs
Emerging markets (EM) had a textbook breakout and followed the bull case scenario we outlined perfectly. After breaking out, EMs have now gone on to make a new all-time high for the first time in nearly three years. The falling U.S. dollar has been a boon for EMs, in addition to hopes of the global economy reopening with promising vaccine results. In the short term, EMs may need a breather to digest the recent big move up, and COVID cases globally are rising. However, EMs have a lot of long-term tailwinds right now.
Real Estate: A Rising Tide Lifts All Boats
Real estate had one of its best months in a long time as the sector rose over 10% in November. Riding the wave of optimism for re-opening the economy that was fueled by positive vaccine results, real estate broke through to make a new six-month high. Though this sector is still very weak on a relative basis when compared to equities, any signs of life are welcome. There are still more questions than answers in this space, so it’s likely more time is needed to repair the COVID-related damage.
Commodities: Bottom Found?
The broader commodities market has been in a visible downtrend for a decade. The combination of a strong dollar, deflation, and low interest rates have battered these hard and soft resources all along the way. But finally, with a weakening dollar and early whiffs of inflation, commodities have found some life. After bottoming in April and getting back up above the 2016 lows, commodities are showing promise. A stronger commodities market has big implications. For starters, it likely means inflation is here. Interest rates will likely rise. Additionally, emerging market equities will likely be outperforming U.S. stocks. The $20 marker looks like a very good line in the sand for this bull case to continue. Below $20, and the reflation trade trade will have to wait.
Fixed Income: For Real This Time?
Interest rates and the economic visibility they provide have been murkier than normal since all of the monetary action that ensued post-COVID. But after a failed attempt in early November, the bellwether interest rate (below) broke through 0.9% again to close the month. You can see the uptrend since August which happens to coincide with federally funded stimulus negotiations. Rates have risen the entire time while the stimulus package size has fallen. If fiscal policy does pass in a timely manner, expect rates to rise, putting a lot of pressure bond holders. The yield is so paltry around 1%, that with rising interest rates, it will be hard for investors to justify holding bonds falling in value in exchange for a low yield.
All Terrain Portfolio Update
The All Terrain Portfolio has continued to add additional risk assets small in size and narrow in focus. We continue to scale into our positions methodically over time in order to better absorb the current highly volatile investment environment. We will continue to follow our methodology and indicators to find buying opportunities and manage risk.
Past performance is not indicative of future results. Other asset classes or investment vehicles may be used in client portfolios and client portfolios may not hold all positions of the model at the same time as the model. This chart and its representations are only for use in correlation to the proprietary timing model by Arkenstone Financial, Registered Investment Advisor. Actual client and All Terrain Portfolio(TM) positions may differ from this representation.
- Rising Rates Create Headwinds - November 8, 2024
- The Fed Finally Cuts Rates - October 10, 2024
- Interest Rates Stabilize, Stocks Bounce - September 6, 2024
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