PIIGS Fly and Other Stories of Investors Reaching for Risky Bets

Risk-seeking investor behavior rolls on. Small-cap stocks and other beaten down segments are putting up good performance stats versus the benchmark indexes. The Russell 2000 is higher for six weeks in a row. That’s the longest streak in nearly two years. And today’s outperformance means it’s well on its way to extending the streak to seven weeks. The gains embody an expectation that small, highly-indebted companies will quickly bounce back as the pandemic eases. Emerging markets continue to outperform, too. Take note of strength in Latin America (MXLA), and Emerging Markets overall (MXEF), which were big laggards in the first wave of infections.

PIIGS do fly. Would you buy negative-yielding debt issued by Spain and Portugal? Those two countries were part of the derisive acronym, PIIGS, when Europe’s sovereign bond markets were in deep trouble in 2011 and 2012. Fast forward to the age of central bank intervention and you’d think those countries were paragons of safety and solvency. Incredibly, investors are willing to pay to own those countries’ bonds. Whether they’re truly safer investments now is debatable. For goals-based investors, we think the message remains clear: very low interest rates are here to stay for a long time, which will encourage this kind of risk-seeking behavior (see last Thursday’s Big Number).

Tesla and the witch. We don’t often talk about single stocks, but this one is too big to ignore.  After rallying over 600% this year, Tesla enters the S&P 500 after Friday’s close. Its addition will be the largest ever by market cap and index weight. The looming event likely caused some weakness in large-cap tech last week. We expect that to continue this week. Brace for fireworks on Friday: Tesla’s addition comes alongside what’s known as “quadruple witching,” the quarterly expiration of single stock and index futures and options, and the rebalancing of the NASDAQ 100 and the S&P’s flagship growth and value indices. Trillions of dollars are benchmarked to these indices; the market may have issues handling the trading volume.

Vaccinations versus lockdowns. The first vaccine doses begin this week, which explains why investors are willing to look through the surge of infections. However, investor complacency about how bright 2021 appears to be may yet be tested by market volatility. Economic lockdowns are spreading and that will hurt the U.S. job market. We expect unemployment claims to head higher; last week’s increase was the biggest since the sudden stop in mid-March.

$900 billion or so, please. Negotiations on a new pandemic relief bill continue in Congress, with some movement this weekend towards a compromise. Getting something done is more important for markets than the actual details of the package. Markets need to know D.C. continues to have their backs. So long as the package is in the ballpark of $900 billion, markets will be pleased. 

Say what, Federal Reserve? Expect some language tweaks to the central bank’s guidance on Thursday after its meeting. But these are just words; in our view there will be no extension of their bond purchase maturity program. Comments from Fed governors and the recent steepening in the yield curve makes us think no action is coming on Thursday, and that will have little impact on bond yields.

What to Watch This Week

  • Public health – The first vaccines are set to be administered in the U.S. this week, while the FDA is meeting on another vaccine candidate.  Markets care about the logistics; any bumps or delays will not be handled well. For most of us, vaccination is a long way off, so keep an eye on Covid cases and further restrictions. 
  • Bank of England goes negative? – Outside of the Fed, 11 other central banks are meeting.  Pay attention to the BOE. It’s opened the door to negative interest rates. Will it indicate it’s going to walk through that door soon
  • Retail sales – U.S. figures for November on Wednesday are expected to show a month-on-month contraction. This is the virus starting to bite on economic growth. Expect more of that type of news in the coming weeks.

This commentary is written by Horizon Investments’ asset management team. Please reach out to Chief Investment Officer Scott Ladner for interviews at 704.919.3602 EXT-3602 or sladner@horizoninvestments.com.

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