Last week, we highlighted that gross domestic product (GDP) and inflation are likely to accelerate year over year in 2021, which could be driving investors to overweight cyclicals and inflation sensitive assets. We originally noted the performance of COVID sensitive areas like airlines, cruise ships, restaurants, hotels, malls, and department stores that should benefit from widespread vaccine access. These stocks continue to perform well, excluding restaurants, which have been impacted by the announcement of more restrictions.
From a factor standpoint, small caps (Russell 2000 reached a new high), value, and high beta continue to outperform.
Source: Koyfin.
Source: Koyfin.
On the industry side, Industrials, Financials, Materials, and Energy are outperforming defensive areas and mega-caps.
Source: Koyfin.
The breadth of the equity market has broadened globally, as over 90% of the stock markets included in the All Country World Index (ACWI) are above their 200-day average and over 75% of the individual stocks in the ACWI are above their 200-day average.
Other inflation sensitive areas like commodities and currencies are also benefiting as the broad commodity index went back above the August high, as did oil (WTI). All 18 commodities in the Reuter’s Continuous Commodity Index are above their 200-day averages.
Source: Koyfin.
Source: Koyfin.
Commodity sensitive currencies like the South African Rand and the Australian Dollar have been appreciating versus the U.S. Dollar. Emerging market currencies have been declining versus the U.S. Dollar for the last ten years but have started to increase over the last few months.
Source: Koyfin.
There are multiple asset classes showing signs of a pending recovery in 2021. As we mentioned last week, the near-term impact of trying to address COVID in the U.S. and the economic weakness in Europe still pose risks to the timing of the recovery. This was clear last week as 10-year interest rates declined in the U.S. and in Germany.
Source: Koyfin.
While there are still near-term risks to the recovery, the market signals are clearly showing that investors are focused on the 2021 recovery and post vaccine environment.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC
