U.S. Equity Markets Continue to Fall as COVID-19 Cases Rise

Investors dump gold at record levels and pour money into global equities.

U.S. equity markets closed out the week with all three major indexes in the red. The U.S. logged another daily record for coronavirus cases Thursday with 187,833 and reported record hospitalizations for the 10th day in a row.

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Late yesterday, Treasury Secretary Steven Mnuchin said that several Federal Reserve programs that have backed corporate credit and municipal-borrowing markets would end on Dec. 31, and asked the Fed to return more than $70 billion in funds that had already been transferred to the central bank to cover loan losses. The Fed barked back, asking for an extension in light of the fact that there is no new stimulus package on the table. 

The recent surge in new cases and deaths is causing investment strategists to roll back their GDP predictions for 2021. JPMorgan was among the first to predict the U.S. economy will shrink at a 1% annualized pace in the first quarter. That would follow estimated growth of 2.8% in the fourth quarter and the reported 33.1% expansion in the third quarter. In other words, the recovery is stalling.

Meanwhile, 2020 continues to surprise us with asset returns. No one could've predicted this scorecard at the beginning of the year.

Throwing Gold Overboard

If you feel like the ship got lighter last week, it's because investors dumped gold at a record level. $4.1 billion came out of the precious metal, with $1 billion of that coming out of Gold ETFs like GLD.  

That's notable, both because it's one of the first times gold has seen outflows this year and for the magnitude of the outflows. It shows a more risk-on approach for large investors, who have anchored themselves to the precious metal all year. Also, investors typically buy gold as a hedge against future inflation. Everyone's worried about inflation, so this trade out of gold is even more vexing. 

Where'd the money go? Where it's been going for the past three weeks:

  • $27 billion into equities$71.4 billion in past two weeks (most on record)
  • $11.9 billion into bonds
  • $9.0 billion into cash
  • $10.8 billion: Emerging market debt and equities

This Isn't Normal

2020 has seen some very peculiar investor behavior. It's rare to see stocks and bond prices rise in the same year, and to have gold and cash also see record inflows. It shows how big money is caught between risk, reward, and the unknown that the pandemic has brought with it.

In the Land of the Giants

You won't be surprised to know that hedge funds have had a very good year. According to Goldman Sachs, the top holdings of hedge funds have delivered a 32% return so far this year, compared to 12% for the S&P 500. It's not necessarily because of their investing prowess either. They managed to buy and hold some of the best performing stocks in the market all year, riding them in search of alpha. See their top holdings, and their performances, in the chart above. 

It Worked, Now What?

The problem now, for many of them, is that the positive vaccine news has shifted investors' appetites toward value stocks and small caps. They don't deliver the kind of outsized returns of the growth giants. Hedge funds can either move where the money is going and risk missing out of more gains like they've enjoyed all year or hold their ground and hope the market rotates back their way. 

These are rich people's problems, but that's why hedge funds earn their two and twenty.

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