Developed Markets on a Tear
In the month of November, international developed stock markets rose by 15.34%. Europe ex UK and the UK recorded returns of 17.09% and 16.78%, respectively. The U.S. and Japan lagged the broader market. Year to date returns have bounced back considerably since the March lows. The U.S. market is up 15.99% while international developed markets in the aggregate are up 2.91%. The financial markets were boosted by positive developments on multiple potential COVID-19 vaccines. Stocks related to travel, tourism, hospitality, and energy, which were most impacted by the pandemic, led the rally.
Emerging Markets Positive for the Year
Broader emerging markets posted a 8.19% return for the month. Brazil and Russia recorded returns of 23.73% and 20.78%, respectively. China and India lagged other markets in November. Countries with more commodity-driven economies led the rally. The broader emerging markets are now in positive territory for the year, up 8.45%. The Chinese equity market is primarily responsible for this performance, recording a YTD return of 26.01%. The implementation and enforcement of proper COVID-19 safety measures has helped many Asian countries increase business activity since March, resulting in outsized stock market performance.
Energy and financials recorded returns of 29.36% and 19.23%, respectively, in November. Utilities and consumer staples lagged other sectors. Information technology companies are now up 34.53% YTD, but their extended valuations and the increasing probability of a COVID-19 vaccine may diminish future performance. Defensive sectors such as materials and telecommunications are strongly positive for the year.
DOMESTIC EQUITY FACTORS
Value Rebounds Strongly in November
In November, value outperformed growth in the large-cap space and small-cap space. Momentum recorded a gain of 9.10%. Relative valuations between value stocks and growth stocks are still near historical highs based on many different valuation metrics, but value-oriented companies were boosted by positive COVID-19 vaccine news. Growth stocks have held up better this year, but their future earnings may not justify the higher valuations. For example, Tesla, at the time of this writing, trades at a trailing 12-month PE ratio of 1227. For a comparison, the S&P 500’s ratio is 37, a historically high figure.
FOREIGN EQUITY FACTORS
Value Outperforms in Foreign Markets
In the international developed markets, value outperformed growth in the large-cap space and small-cap space. Momentum recorded a gain of 10.11% while small-cap emerging market stocks posted a return of 13%. Foreign value companies are now close to positive territory YTD. Foreign momentum strategies have performed well year to date and over the past twelve months.
Interest Rates to Remain Low
In November, the three-month Treasury bill index returned 0.01% for the month. Interest rates on Treasury bills and money market funds are close to 0%. The Federal Reserve indicated they will keep interest rates at current levels until inflation picks up, which may take years. Savers may face low rates for a long period of time, which will negatively impact retirees and people close to retirement. Real yields, meaning yields adjusted for inflation, are in negative territory. This means cash sitting in money market funds or savings accounts are losing purchasing power. The CPI decreased by -0.80% through October.
DISINFLATION DEFLATIONARY HEDGES
Fixed Income Remains Steady
The returns of deflationary hedges were mostly positive for the month. Long-term government bonds returned 1.20% and are up 18.93% year to date. The Bloomberg Barclays U.S. Agg Bond Index returned 0.98% in November. Riskier forms of credit such as high-yield bonds and leveraged loans were positive for the month. The real yields on the investment-grade corporate bond universe are now close to 0%.
INFLATION SENSITIVE INVESTMENTS
Gold Price Continues to Climb
Inflation-sensitive investment returns were mostly positive for the month. Gold bullion posted a gain of 11.13%. The Alerian MLP index dropped by -3.55% in July. Gold bullion is up 29.72% YTD, outperforming most other assets. Gold miners have also outperformed as they provide levered exposure to the gold price. Domestic and foreign REITs are still down approximately -20%.
U.S. Dollar Mixed
Over the past three months, the U.S. dollar had mixed results against other major currencies. The U.S. dollar depreciated against the Japanese Yen, Chinese Yuan, and Mexican Peso the most. Over the past year, the U.S. dollar has depreciated against most major currencies except the Mexican Peso and Indian Rupee. The continuation of large U.S. fiscal stimulus packages may weigh on the U.S. dollar in the medium-term to long-term.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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