Oil Prices Continue to Rise
Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP®
DEVELOPED MARKETS
Developed Markets Rebound
In the month of October, international developed stock markets returned 2.98%. Canada and the U.S. recorded returns of 7.61% and 6.95%, respectively. Japan and Pacific ex Japan lagged other markets. The U.S. stock market is up 22.98% YTD while international developed markets are up 12.44% YTD.
After peaking in September, new COVID-19 cases have steadily declined. Government imposed restrictions have also steadily declined, which may boost economic activity.
EMERGING MARKETS
Russia Continues to Rise
Broader emerging markets posted a 1.13% return for the month. Russia and China recorded returns of 4.27% and 3.16%, respectively. Korea and Brazil lagged other markets in October. The Chinese market rebounded last month as investors continued to assess its debt-laden real estate sector. Emerging markets in the aggregate are up 1.93% YTD. Emerging markets still trade at a meaningful valuation discount relative to the U.S. market.
GLOBAL SECTOR
Energy and Consumer Discretionary Outperform
Energy and consumer discretionary recorded returns of 8.07% and 8.56%, respectively, in October. Telecommunications and consumer staples lagged other sectors. The energy sector continues to rebound after a tough 2020. Oil supply in the U.S. is constrained while OPEC is carefully moderating its output. Oil demand should continue to improve as governments and corporations are encouraging more people to get a COVID vaccine and pandemic effects continue to roll back worldwide.
DOMESTIC EQUITY FACTORS
Value Underperforms Growth
In October, value underperformed growth in the large-cap space and small-cap space. Momentum recorded a return of 8.84%. Small-cap value stocks started the year strongly and are up 27.60% YTD. Even after value’s strong performance this year, relative valuations between value stocks and growth stocks are still high based on many different valuation metrics. Value-oriented sectors such as energy, financials, and materials may still have much more room to run.
FOREIGN EQUITY FACTORS
Growth Outperforms in International Markets
In the international developed markets, growth outperformed value in the large-cap and small-cap space. Momentum recorded a return of 4.03% while small-cap emerging market stocks posted a return of -0.03% this month. Small-cap emerging market stocks are up 12.32% YTD. The rotation from growth into value may resume as investors become wary of high valuations in growth stocks. Rising interest rates may also pose more of a risk to growth stocks than value stocks.
LIQUIDITY PROVIDERS
Interest Rate Hikes a Possibility
In October, the three-month Treasury bill index returned 0.00% for the month. Interest rates on Treasury bills and money market funds are close to 0%. The Federal Reserve continues to keep interest rates near 0%, but the recently high inflation numbers, labor scarcity, and pending stimulative legislation may reopen the possibility of higher interest rates. However, savers will still face low short-term interest rates for the foreseeable future. If inflation continues to rise and rates are still artificially suppressed, then retirees will be negatively impacted because their purchasing power will decrease. The CPI has increased by 5.38% over the past year through the end of September.
DISINFLATION DEFLATIONARY HEDGES
Municipal Bonds Up YTD
The returns of deflationary hedges were mixed for the month. Long-term government bonds returned 1.84% in October as the Treasury yield curve flattened. They are still down -5.69% YTD. The Bloomberg Barclays U.S. Agg Bond Index was flat in October. Catastrophe bonds are up 3.99% over the past year, providing a competitive yield without the equity-like volatility of leveraged loans and high-yield bonds. Real yields continue to remain around historical lows.
INFLATION SENSITIVE INVESTMENTS
Oil Prices Continue to Rise
Inflation-sensitive investment returns were mostly positive for the month. WTI crude oil and U.S. real estate were up 10.72% and 8.18%, respectively. The Bloomberg Commodity index posted a return of 2.58%. WTI crude oil is up 75.37% YTD and 134.28 in the past year. Inflation-sensitive investments are benefiting from the reopening of economies, supply constraints and pent-up consumer demand.
WORLD CURRENCIES
U.S. Dollar Depreciated Over the Past Year
Over the past year, the U.S. dollar depreciated against most other major currencies. The U.S. dollar appreciated against the Japanese Yen and Euro but depreciated against the Swiss France, U.K pound, Chinese Yuan, and Mexican Peso. The continuation of large U.S. fiscal deficits 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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