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.
To download a copy of this commentary and the chart of the week, click the button below.
To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or info@horizoninvestments.com.
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. It is not possible to invest directly in an index.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2020 Horizon Investments LLC
Bank woes raise questions about the Fed’s next move.Investors’ sudden...
Insights
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
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.
To download a copy of this commentary and the chart of the week, click the button below.
To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or info@horizoninvestments.com.
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. It is not possible to invest directly in an index.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2020 Horizon Investments LLC