With long-term interest rates rising rapidly and the potential for higher inflation, it is not surprising to see investments in natural resources, such as energy, outperforming the broad market by a wide margin (Chart 1). The declining strength of the U.S. dollar vs. other currencies is also an important contributing factor, since many of the commodities are priced in dollar terms.
Out of the 40 Fidelity Select sector funds, Energy Services (FSESX) is the best performer (Chart 2).
Large integrated oil companies are also benefiting from higher oil prices and renewed interest from investors (Chart 3).
The 5-year chart of the Fidelity Select Natural Resources Fund (FNARX) shows that there is plenty of runway left before reaching the previous high in 2018 (Chart 4). This is in sharp contrast to most equity sector funds, which already surpassed their previous highs.
In a previous article, I highlighted the Fidelity Global Commodity Stock Index Fund (FFGCX) as another excellent mutual fund that allows investing in the natural resources boom. FFGCX continues to make higher highs and higher lows while outperforming the S&P500 index (Chart 5).
The S&P 500 index continued the bullish momentum in the first weeks of 2021 and made a new record high at the end of last week. We are cautiously bullish, as the combination of the rollout of COVID19 vaccinations, expectations for additional fiscal stimulus, and a rebounding economy can continue to fuel the gains. However, in our view, international tensions and the uncertainty around anticipated tax legislation can become headwinds for the equity market.
Steadily rising interest rates caused long-term Treasury bonds to enter a declining trend starting in August 2020. This declining trend continued in January 2021 (Chart 2).
While large-cap technology and other growth investments received most of the attention in recent months, we’d like to note that value stocks have outperformed the large-cap S&P 500 index (Chart 3). We think that this is largely due to money coming out of declining bond investments. In essence, dividend-paying value stocks are taking the place of traditional income-oriented bond funds.
Small-caps are also outperforming large-caps since the lows of the COVID19-related market panic in March 2020 (Chart 4). Since smaller capitalization companies were impacted more severely in the pandemic, a rebounding post-covid economy makes small-cap stocks more attractive, as a group.
We see the declining trend for the U.S. dollar vs. the basket of major currencies continuing, but the weakness will probably depend on the extent and frequency of the fiscal stimulus and changes in monetary policy.
In part due to the weakening dollar and part due to the strengthening global economy, natural resources are in a rising trend. I’d like to highlight here the benchmark West Texas Intermediate Crude (WTIC) oil. WTIC hovered in a broad trading range between August and November of last year but started a steady climb after the first positive news about the COVID19 vaccines became available (Chart 5). We would not be surprised to see natural resources performing well in 2021.
International markets are also providing exciting performance currently with emerging markets leading the way (Chart 7), as economies in Southeast Asia seem to recover faster from the pandemic than the U.S., and Latin American economies benefitting from the natural resources boom.
European markets are starting to lag the S&P 500 index (Chart 8), probably due to a slower pace of the vaccinations, and the short-term economic disruption caused by BREXIT. A notable exceptions are Southern European countries, such as Italy and Greece, which will benefit from increased tourism post-covid.
Improving U.S. economic conditions and the strengthening of the dollar resulted in higher interest rates in the last six months. The yield on the long-term Treasury bonds is slightly above 3% now:
As the consequence, bond funds investing in Treasuries did not perform well in the same period:
On the other hand, investors who were willing to take higher risks in search for higher income have been well rewarded.
For example, the Fidelity High Income Fund (SPHIX) invests in corporate bonds and it offers both a respectable 5.28% yield and the potential for strong appreciation of its Net Asset Value, should the U.S. economy continue to grow in 2017:
Another example is the Fidelity Real Estate Income Fund (FRIFX) with a current yield of 4.16%:
Investors who are interested in diversifying into international assets can also consider the Fidelity New Markets Income Fund (FNMIX) with a current yield of 5.42%. FNMIX holds the majority of its assets in debt securities of emerging market companies.
After the market turmoil in the second half of 2015, new trends have emerged in 2016. One of the important new trends is that the long-term Treasury yield index reversed direction and going lower:
Lower long-term interest rates coupled with the strengthening U.S. economy makes bond investments attractive again. The Fidelity U.S. Bond Index Portfolio Fund (FBIDX) is a great way to participate in the new investment environment, because FBIDX invests in both Treasury and corporate bonds.
One of our long-term favorites is the Spartan Municipal Bond Fund (FHIGX). This fund has been making steady gains since October 2015 and we believe that the improving economy should continue to strengthen the credit worthiness of issuers and increase demand for municipal bonds.