Records All Around but Performance Divergences
It may have been a challenging year in Main Street, and with three weeks left before the end of the year, it has been a decent year on Wall Street. However, despite record highs in many markets, there continue to be price divergences in financial asset classes.
Within US equities, the Dow Jones Industrial Average (INDU) climbed to the 30k milestone late last month and is now up 4.16% YTD. The S&P 500 Index (SPX) has also surpassed both its Feb and Sep 2020 all-time highs of 3,393.52 and 3,588.11, respectively. In the process, it has appreciated 13.33% YTD. The technology-laden NASDAQ Composite Index (COMPQ) also recorded new all-time highs and has jumped 37.70% YTD. S&P 400 Midcap Index (MID +8.29%), S&P Midcap Index (SML +5.90%), MSCI Emerging Market Index (EEM +11.72%), and MSCI EAFE Index (EFA +4.04%).
In the fixed income, there are also noticeable differences in YTD performances. The long duration US Treasuries such as 20+ US Treasury Bond (TLT +15.87%) has dramatically outperformed the 7-10-year US Treasury Bond (IEF +9.20%) as well as the short duration (SHY +2.85%). The Inflation-Indexed Bond ETF (TIP +9.28%) traded in line with the Investment Grade Corporate (LQD +9.70%) while Muni Bond (MUB +4.51%) and High Yield Bond (HYG +3.02%) underperformed peers so far this year.
In the commodities arena, there were sharp divergences in specific commodities. The bench-mark commodity index, CRB Index, was down 14.33% YTD, driven lower by the S&P GSCI Energy (GJX -25.33% YTD) and the S&P GSCI Livestock (GVX -9.77%). On the opposite spectrum, the S&P GSCI Precious Metals (GPX +23.55% YTD), the S&P GSCI Industrial Metal (GYX +18.03%), and S&P GSCI Agriculture (GKX +9.31%) all recorded sharp gains so far this year.
Within the currency markets, the US Dollar Index (USD -5.94%) and the Mexican Peso (MXNUSD -5.09%) dramatically underperformed their trading partners. The best returns came from the commodity-driven currencies such as AUDUSD (+6.24%), CADUSD (+1.52%), and from the EURUSD (+8.40%).
In summary, although record highs occurred, it was uneven. Not all markets generated positive returns for the year. Investors may be looking past the COVID-19 pandemic to better economic and market conditions. Nonetheless, it remains a selective market. In US stocks, the top-heavy technology giants account for more than 20% of the overall SPX Index by market value. It is more concentrated in the NASDAQ Composite Index and the NDX 100 Index. With around 3-weeks left before year-end, it is reasonable to expect year-end window dressing will influence the various securities as the strong becomes stronger and the weak becomes weaker into the next few weeks.