by David Rasmussen on Jan 15, 2021
The S&P 500 fell slightly this week, closing down roughly 1.5%. The small cap Russell 2000 index continued to be the outperformer, adding another 1.42%. Since December 31, the small cap index has risen nearly 7.5%. Large cap stocks have been dragged down by the big tech names which have carried the index for the better part of two years. Amazon, Netflix, Apple, Facebook, and Google all fell in excess of 3% this week. While there certainly has been a lot of froth developing over the last 9 months in the tech space, some of the recent losses may be in part to rising interest rates.
The price of the 30 year US Treasury bond has fallen over 3.75% so far this month. As interest rates rise the price of bonds falls. Interest rates, so far this year, have risen in tandem with commodity prices. While the price of gold has given back nearly 4% so far this year, the rest of the commodity space has been strong. The iShares S&P GSCI Commodity-Index ETF has gained over 4.75% so far this year.
Bonds have been in a bull market for nearly 40 years, and while it has never been profitable for long to bet against them during this time, one does start to question the sustainability of low rates in the face of so much government spending. Normally we see low rates at a time when stocks are depressed. Given that nearly all US indices are sitting at their all-time highs at the same time as the 10 year US Treasury is yielding 1% it is hard to see how much traditional diversification will help should the market start to falter.
At current conditions it may be prudent to start to look outside of diversification for risk protection. Some of these methods include increasing exposure to precious metals and adding options to hedge against adverse market moves.
Thanks for reading,
Zach and Dave
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