US equity markets ended the week with all three major indices in the red. The United States recorded another daily record for coronavirus cases Thursday with 187,833 and reported record hospitalizations for the 10th day in a row.
This article is an excerpt from our free newsletter The Market Sum. Sign up here to have it delivered to your inbox daily.
Late yesterday, Treasury Secretary Steven Mnuchin said several Federal Reserve programs that had supported business credit and municipal debt markets would end on December 31 and called on the Fed to return more than $ 70 billion. dollars of funds already transferred to the plant. bank to cover loan losses. The Fed barked, asking for an extension given that there is no new stimulus package on the table.
The recent spike in new cases and deaths is leading investment strategists to reverse their GDP forecast for 2021. JPMorgan was among the first to predict that the US economy will contract at an annualized rate of 1% in the first quarter . This would follow an estimated 2.8% growth in the fourth quarter and the 33.1% expansion reported in the third quarter. In other words, the recovery is stagnating.
Meanwhile, 2020 continues to surprise us with asset returns. No one could have predicted this scorecard at the start of the year.
Throw gold overboard
If you feel the ship has eased over the past week, it’s because investors threw gold at an all-time high. $ 4.1 billion came out of the precious metal, including $ 1 billion from gold ETFs like GLD.
This is remarkable, both because it is one of the first times gold has seen exits this year and for the magnitude of the exits. It shows a riskier approach for large investors, who have anchored the precious metal all year. In addition, investors generally buy gold as a hedge against future inflation. Everyone is worried about inflation, so this gold trade is even more upsetting.
Where did the money go? Where it’s been going for three weeks:
- $ 27 billion in stocks $ 71.4 billion in the past two weeks (most never on record)
- $ 11.9 billion in bonds
- $ 9.0 billion in cash
- $ 10.8 billion: emerging market debt and equities
It is not normal
2020 saw very particular investor behavior. It’s rare to see stocks and bond prices rise in the same year, and having gold and cash is also registering record inflows. It shows how much money is caught between the risk, the reward and the unknown that the pandemic has brought.
In the land of giants
You won’t be surprised to know that hedge funds have had a very good year. Major hedge fund holdings have returned 32% so far this year, compared to 12% for the S&P 500, according to Goldman Sachs. That’s not necessarily because of their investment prowess, either. They’ve managed to buy and hold some of the best performing stocks on the market all year round, riding them in search of alpha. See their main titles and performance in the table above.
It worked, what now?
The problem now, for many of them, is that the positive news about vaccines has shifted investor appetites towards value stocks and small caps. They don’t deliver the kind of outsized returns that the growth giants have. Hedge funds can either move where the money is going and risk missing out on more gains like they’ve enjoyed all year, or hold onto their ground and hope the market will come back in their favor.
These are the problems of the rich, but this is why hedge funds are making their money.