Week of November 21, 2016
Investors in the U.S. were clearly in a risk-on mood as all three major benchmarks were positive for the week. The S&P 500 was up 0.81% for the week while the NASDAQ Composite, the outperformer, was up 1.61%. Alternatively, the Dow Jones Industrial Average was up just 0.11%. International markets, however, didn't fare as well.
European equities, as measured by the MSCI Europe Index, were down 2.05% while China's Shanghai Composite and Japan's Nikkei 225 Average were down 1.2% and 0.38%, respectively. For our commentary this week we discuss the roller coaster gold is on, currencies and the widening gap between large-cap and small-cap stock performance, and an interesting story on surgeons and how they stay focused for hours on end.
Gold Roller Coaster
Gold is an important indicator of risk-aversion. The general environment over the past few weeks has moved from total despair to high optimism and the sentiment is clearly visible in the recent gold price movements. Gold started the year at a low of $1,060 per ounce and peaked at $1,365 per ounce on July 6, or 29%. Demand surged in the first two quarters due primarily to heightened uncertainty, the European banking system crisis and, of course, Britain’s exit from the European Union. In the third quarter, gold prices faced considerable headwinds from domestic events including the Fed's decision to stand pat on rate hikes and the Presidential Election. The precious metal surged pre-election on uncertainty around the contest but experienced a sharp post-election sell-off on speculation that fiscal and trade policies under President-Elect Trump’s administration could stoke inflation. Generally, a higher inflation figure typically results in rising interest rates which directly impacts gold. Indeed, gold is highly sensitive to rising rates which raises the opportunity cost of holding non-yielding assets. The precious metal has fallen more than 10% from its 2016 high and approximately 6% from its November high of $1306.8 per ounce as of this writing. Through the end of last week, return on gold for 2016 was a little over 14%.
Currency - Wild Moves
The performance of global currencies has mirrored that of gold over the past few months, largely for similar reasons. Take the British pound, for example. The pound sterling has seen significant volatility this year as investors continue to react to the Brexit and the instability of the European banking system. Turning to the U.S. dollar specifically, the greenback has been on a sharp upward trajectory since the election result, buoyed by optimism around the President-Elect’s proposals to increase spending and cut taxes that will push inflation and interest rates. The dollar index, which tracks the U.S. dollar against a basket of six major currencies, was up 2.6% from November 8 to November 16, touching a 13-year-high. More specifically, the U.S. dollar appreciated 4.4% against the yen, 3.3% against Euro and the Australian dollar, and 2.8% against the Swiss franc while the pound continued to hold its own appreciating 0.4% against the U.S. dollar. The sell-off in emerging-market currencies was similar to other major currency pairs, with the Mexican peso hovering near historic lows. Markets are speculating that higher interest rates could spark an outflow of capital from emerging markets as investors move capital out of those areas.
Source: Data from Investing.com modified by Cresco Research
A Widening Gap: Small Cap vs. Large Cap
The Russell 2000 Index, an index that tracks 2,000 small and mid-cap companies, was up 15.82% through the end of last week, handily beating the large-cap S&P 500 at 6.75%. The speculation on President-Elect Trump’s promises to prioritize American corporations and rebuild infrastructure has resulted in a sharp rally in small cap stocks as investors believe these policies will favor financial, industrial and materials companies. For the financials, investors believe these companies are likely to benefit from an impending interest rate hike this December while Trump's infrastructure plans are expected to provide a boost to industrials and materials stocks, both of which are heavily represented in the small-cap index. What's more, large-cap stocks on the S&P 500 are multinational, diversified companies with significant international exposure, contributing to the performance dispersion. An appreciating dollar, changes in trade policies and changes to corporate taxes represent possible headwinds for these stocks while smaller domestic companies tend to be less impacted. Interestingly, the two benchmarks were trading roughly in line until the election results were released when the Russell 2000 surged 4.61% since November 10 compared to 0.2% posted by its larger-cap cousin over the same period.
Source: Morningstar Direct
Fun Story of the Week
How do you stay focused on a specific task for an hour or two? What about 10 hours? Or, to take things to an extreme, what about 10 hours performing a complicated organ transplant? This is a very interesting question and one that surgeons on the abdominal-organ transplant team at Montefiore Einstein Center for Transplantation were perfectly willing to answer. The simple fact that they are saving a patient's life is more than enough for these surgeons but they do employ other techniques to stay focused. Some are relatively straight forward like wearing comfortable shoes or tight support stockings to ease the stress of being on one's feet for hours at a time. Other methods such as yoga in the mornings and even shots of espresso mid-procedure help these doctors through the surgeries. For the Montefiore team, they typically have one marathon surgery a week but they are always on call due to the nature of organ transplants. For this reason, surgeons typically have a short "shelf life", according to Dr. Kinkhabwala, who goes on to add that careers in his field typically run from the mid-30s to the 50s as surgeons move on to other procedures or begin teaching the next generation of doctors.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The prices of small cap stocks are generally more volatile than large cap stocks. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX
The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
SHANGHAI COMPOSITE INDEX
The Shanghai Composite Index is a market index of all stocks (A shares and B shares) that are traded on the Shanghai Stock Exchange. It tracks the largest publicly traded companies in China.
US DOLLAR INDEX
The US Dollar Index is an index of value of the US Dollar relative to a basket of foreign currencies that include the Euro, the Japanese yen, the Pound Sterling, the Canadian dollar, the Swedish krona and the Swiss franc.
Gold Price, November 2016. http://goldprice.org/gold-price-usa.html
HDTV Profit, November 2016. http://profit.ndtv.com/news/commodities/article-gold-drops-to-5-month-low-as-dollar-strengthens-1625134
Its Veso, November 2016. http://www.bloomberg.com/news/articles/2016-11-10/trump-rotation-has-small-caps-beating-s-p-500-most-in-five-years
Seeking Alpha, November 2016. http://seekingalpha.com/article/4024046-small-caps-trump-rally-logical-bezeks-daily-briefing
Wall Street Journal, November 2016. http://www.wsj.com/articles/how-surgeons-stay-focused-for-hours-1479310052