Top Weekly Themes
- Oil at a Two-Year High – Commodities, in general, have had a strong showing in recent months, and the energy complex has participated in that advance in a big way. Last week Brent Crude prices moved above $71 a barrel, a two-year high. Oil has benefitted from increased demand as the economy continues to track toward a return to normalcy. Still, it is notable that this advance came even though the Wall Street Journal announced that a group of oil producers, led by Saudi Arabia and Russia, have agreed to continue rolling back the steep production cuts they made at the start of the pandemic. This increase in supply, in addition to other output increases earlier this year, would bring back roughly half of the 9.7 million barrels that this group removed from the market in early 2020. While energy’s weight within the S&P 500 now stands at less than 3%, the returns in this tiny sector have been outsized in 2021, with the sector up over 47% through last Thursday’s close. From the perspective of investment style, value stocks have been the clear beneficiary of this trend, as traditional energy companies are not often found in growth-oriented indices – a dynamic that has been positive for our positioning, which is overweight value relative to growth.
- Jobs Friday – For the U.S. economy to heal fully, the labor market must continue to recover. Most indicators showed we were swiftly moving in that direction heading into the April jobs report (announced on May 7). However, the 266,000 new jobs added in April massively trailed expectations of 975,000, and the prior month was also revised lower by 146,000. There are logical reasons for the shortfall (i.e., elevated unemployment benefits), but May’s employment reporting was telling. That report card arrived last Friday morning when it was announced that nonfarm payrolls advanced by 559,000, vs. the estimate of 650,000. While this was a big step up from April, it once again trailed estimates, admittedly by a far smaller margin. With payrolls in the U.S. still over seven million short of where they before the pandemic, plenty of healing remains on the jobs front.
- Meme Stock Redux – Earlier this year, we labeled one of our narratives: Game Over? At that time, we reviewed the performance of GameStop (NYSE: GME), which had started the year at $18.84, then traded as high as $483 just four weeks later, translating to a return of over 2,500% in less than a month. The stock then collapsed to roughly $50 within about a week’s time – which led us to conclude that the game was over for this stock. Since then, despite questionable business fundamentals, more time has been added to the clock, as shares of GME were trading hands at over $280 last week. Fueled by online message boards, shares of GameStop, along with other meme stocks (including AMC Entertainment and Koss Corporation), have all seen outsized advances in 2021. We are firm believers that, in the long run, stock prices reflect the fundamental value of the underlying businesses. Still, we readily acknowledge that for the meme stocks, the disconnect has lasted longer than we would have expected. In the end, either the fundamentals of these businesses will catch up to their share prices or vice versa. We count ourselves in the latter camp, with the reconciliation to ultimately, and lastingly, take place from a share price standpoint.
Returns Table
| Equities | Week(%) | YTD(%) | 1-Year(%) | 3-Year(%) | 5-Year(%) | Div Yield |
|---|---|---|---|---|---|---|
| S&P 500 | 0.6 | (0.8) | 26.1 | 24.25 | 17.94 | 1.22 |
| Russell 1000 Value | 1.2 | 1.5 | 22.7 | 16.79 | 11.35 | 1.77 |
| Russell 1000 Growth | 0.0 | (3.5) | 23.4 | 30.79 | 23.83 | 0.64 |
| Russell 2000 | (0.8) | (3.1) | 3.3 | 16.00 | 11.25 | 0.94 |
| MSCI EAFE | (0.5) | 0.7 | 10.3 | 12.91 | 9.74 | 2.51* |
| MSCI EM (Emerging Markets) | 3.7 | 2.9 | (4.0) | 11.03 | 10.03 | 2.38* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Div Yield |
| Bloomberg Barclays US Aggregate | (0.3) | (1.5) | (1.9) | 4.21 | 3.16 | 1.98 |
| Bloomberg Barclays US High Yield – Corporate | (0.2) | (0.6) | 4.6 | 7.50 | 5.93 | 4.45 |
| Bloomberg Barclays Municipal Bond | (0.7) | (0.9) | 0.7 | 4.30 | 3.74 | 1.31 |
| Bloomberg Barclays Global Aggregate x US (Country) | 0.3 | (0.3) | (5.8) | 2.44 | 2.94 | 1.15 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | 6.2 | 9.9 | 55.3 | 17.0 | 9.3 | 82.6 |
| Natural Gas (NYM $/mmbtu) Continuous | 16.6 | 21.6 | 59.8 | 13.7 | 5.1 | 4.3 |
| Gold NYMEX Near Term ($/ozt) | 0.1 | (0.0) | (0.9) | 12.4 | 8.8 | 1,827.2 |
| Copper Cash Official LME ($/mt) | (1.2) | (0.2) | 21.1 | 17.7 | 10.9 | 9,665.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.13 | 1.24 | 1.22 | 1.15 | 1.07 | 1.14 |
| Japanese Yen per U.S. Dollar | 115.79 | 115.16 | 104.20 | 108.41 | 114.03 | 114.85 |
| U.S. Dollar per British Pounds | 1.36 | 1.35 | 1.36 | 1.28 | 1.22 | 1.37 |
Chart of the Week
History of Market Corrections
While market corrections are always painful, they are normal and occur regularly – effectively a known occupational hazard for any equity investor.
The chart above shows the number of corrections – defined by a decline of at least 10% – experienced by the S&P 500 – broken down by decade – since year-end 1927. The dots above the bars reflect the average number of days between corrections of at least 10% for that decade.
Not surprising to any market historian, the largest number of such corrections took place during the Great Depression decade of the 1930s, with the 2000s in a very distant second.
In total, as per Nasdaq Dorsey Wright, there have been 98 such corrections within the market since the start of 1928. That translates to an average of one correction roughly every 347 days. Looking only at more recent data, since the 1950s, the average is closer to one every 17 months.
Through last Thursday’s close, we were just under 465 days from our last correction, which is modestly below the average since the 1950s and well below the average for the 1990s and 2010s. It should also be noted that from mid-2011 to 2015, and before that from 2002-2007, we experienced multi-year time periods between corrections.
While the timing of the next correction is unknown, from solely a historical perspective, there would be ample precedence for the current advance to continue without a 10% setback for some time.
Commentary
The Mighty Greenback?
For any U.S. investor owning equities based outside of this country, returns are a function of the change in the prices of those stocks along with the change in the value of the local currency relative to the U.S. dollar.
The chart above shows the exchange ratio of the U.S. dollar relative to a basket of foreign currencies over the trailing decade.
At the outset of the decade, using this metric, the dollar was valued at roughly 75 and peaked at around 103 near year-end 2016. During that time period, this effectively created a 37% headwind for an international investment relative to an investment denominated in the U.S. dollar.
Over the past five years, the dollar has been somewhat range-bound but is now tracking toward its 2018 low. From a technical standpoint, were it to take out the 2018 lows, we would not be surprised to see added weakness, which would be a tailwind for international equities.
