AdvisorShares Weekly Market Review – Week Ending 11/11/2016
Highlights of the Prior Week
A Dark Gray Swan?
In case you hadn’t heard, Donald Trump beat Hillary Clinton in the Presidential Election as he won the electoral college while narrowly losing the popular vote. By now this has been dissected politically every which way but there are some interesting market related concepts and reactions to consider. While the one candidate emerging as the winner in a two person race obviously does not meet the definition of black swan, it was enough of a surprise that we can invoke a little humor in calling it a dark gray swan.
Based on polling and market oriented indicators (betting houses, trading in the Mexican peso and gold) before the election, the outcome was a mere formality. That consensus of course turned out to be incorrect along the lines of the Brexit back in June as well as other surprises in market history. Also noteworthy was the crash in equities that occurred Tuesday night into Wednesday morning but which had completely recovered 28 minutes into the trading day on Wednesday. We write often about the tendency for fast declines to snapback quickly but this one may have been a record, there was essentially no dip to buy.
Perhaps more interesting than the reaction in the stock market has been the carnage in the bond market. You likely heard that $1 trillion in bond market assets had been wiped out during the week but the selloff had been going on for several weeks. Since the start of October, the Ten Year US Treasury Note has gone from 1.60% to 2.11% at Thursday’s close (there was no trading Friday for Veterans Day). Early Monday,the ten year was trading at 2.25%. For some context to the impact on certain bond funds, a popular longer dated treasury bond ETF is down more than 10% since the start of October and an ETF tracking 25 year zero coupon bonds, probably the most volatile way to access the treasury market, is down 16%. The logic behind the huge jump in yields is that if President Trump implements all or even some of his policies it would be inflationary.
There is no way to know whether this is the big one with regard to interest rates but the reaction in the bond market serves as an excellent reminder of how quickly the market can move. For a long while here we have discussed this exact issue. We can’t know when rates will normalize but it is the obvious risk to bond market participants and when it happens there will be investors caught off guard. This is unnecessary as the risk is clear and there are countless way to access yield while not taking the interest rate risk that exists in the types of funds mentioned above.
Yields elsewhere also rose. The German bund now yields 0.31%, the French OAT is up to 0.74% after being a teenager earlier this fall, the UK gilt jumped to 1.36%, the JGB is just two basis points from going positive and the Swiss ten year note now charges 17 basis points after being at -0.50% just a few weeks ago.
There was also a violent reaction in the currency market especially for emerging market pairs. The dollar rose 9% against the Mexican peso last week, it rose almost 6% against the South African rand and 4.8% against the Polish zloty as a few examples. Those are huge moves for just one week. The dollar also rose 3.4% against the yen.
Finally, there was also movement in the commodity markets including a modest decline in gold, a big rise for copper, a decent lift for zinc and a modest gain for nickel after selling down at the end of the week. Dennis Gartman was interviewed in several places as recommending things that if you dropped them on your foot they would hurt because of Trump’s talk of needing to fix/improve the infrastructure. Crude oil though, has been working lower, trading near $42 early Monday.
Because sometimes the obscure is interesting, Atlas Obscura reports on The Long Death of Product 19, the Most Beloved Cereal You’ve Never Heard Of;
The name, immediately, was a bit curious, and its origins, perhaps fittingly, remain apocryphal. According to one story, it was so named because the end product was the 19th iteration of the cereal they were developing. Others say it was simply the 19th product Kellogg’s developed that year. Either way, Product 19 stuck, a workmanlike name that echoed what the cereal promised to do: provide a base of nutrition, nothing more or less.
Coming soon to a small screen near you; ESPN Films’ 30 for 30 “This Was The XFL” to premiere in February;
Bringing together a cast of characters ranging from the boardrooms of General Electric to the practice fields of Las Vegas, “This Was the XFL” is the tale of — yes — all that went wrong, but also, how the XFL ended up influencing the way professional team sports are broadcast today. And at the center of it all – a decades long friendship between one of the most significant television executives in media history and the one-of-a-kind WWE impresario. This film will explore how Ebersol and McMahon brought the XFL to life, and why they had to let it go.
As for the sectors of the S&P 500, four outperformed the broad benchmark – Financials, Industrials, Healthcare, and Discretionary. The remaining seven – Materials, Energy, Technology, Telecom, Real Estate, Staples, and Utilities – each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 15.29% for the week ending 11/11/16, with Financials outperforming all, and Utilities coming in last.
For November 7th, 2016 to November 11th, 2016
As measured by the S&P 500 sector indices, respective performances were: