Follow the golden rule of investing, avoid large losses

– The markets predicted the US elections correctly; Donald Trump indeed won his second term as US President while Republicans now have the majority both in the Senate and the House. As noted in our previous issue markets were already betting on Trump. US voters explicitly communicated that they want change. Hence this marks an important turning point for both the US and the world as this sets the stage for meaningful change in American politics as well as international trade which will have some serious spillover effects to the financial markets.

– We have already seen the shift in global market dynamics with equities and crypto shooting up and some serious volatility in commodities and bonds. This is because markets expect a stronger US economy with lower inflation under Trump, basically a similar environment to the one his administration had created while he was in office in 2016-2020. Whether he will be able to deliver on that is of course another matter, but for the time being it doesn’t look like the excitement in the US markets will subside any time soon, particularly as the markets expect more FED rate cuts.

– Despite this positive sentiment in the US, emerging markets and Europe continued to experience some weakness in November. They are still impacted by weak macroeconomic fundamentals and higher inflation. While the US Presidential election has a put lid on the issue of sticky inflation and weak macroeconomic fundamentals, it still doesn’t change the fact that there is divergence across global macroeconomic activity and monetary policies, which may prove to be painful for the markets in the next little while.

– US equities were fueled by Trump’s economic plans geared towards making US economy more competitive, strengthening the dollar and reducing taxes across the board. The prospective FED rate cuts also helped. As of November 29^th, the US equity index S&P 500 was up by a whopping +5.7% on the month, bringing its year-to-date return to +26.8%. The European stock index on the other hand retreated in November as macroeconomic conditions remained weak. Since end of April bond prices have been on the rise which means yields have been dropping.

– Trump’s pro-crypto stance and the easing global liquidity conditions had Bitcoin shoot up almost hitting the monumental $100,000 mark. As of November 29^th, Bitcoin was up by a jaw dropping +39.2% on the month, while Ethereum was up by an equally impressive performance of +42.8%. Despite its weak performance in August, Bitcoin has an exceptional year to date performance with +129% while Ethereum underperformed Bitcoin by delivering +57.5% since the end of 2023.

– The approaching US Presidential election on November 5^th and the monetary easing had helped gold climb throughout 2024. At the end of October, the first month futures contract for gold had hit $2800 per ounce and was up by 35.2% year to date. As the uncertainty around the election eased, gold started to unwind a good chunk of its gains and dropped by -8.2% from its peak to $2570 as of November 14^th before climbing back up by + 4.3% closing the month at $2681, making November a very volatile month for gold. After all was said and done, as of November 29^th, the first month futures contract for gold was down by -2.5% on the month pulling its year to date return down to +29.4%.

– Crude oil had a relatively quiet month. As of November 29^th, the first month futures contract for US crude oil WTI was down by -1.1% on the month pulling its year-to-date loss to -4.4%. The positive outlook in global equities helped Turkish stock market. As of November 29^th, Borsa Istanbul Index BIST100 was up by +8.9% in local currency terms (+7.5% in US dollar basis) over the month moving its year-to-date return in local currency terms to +29.2% (+10% in US dollar basis).

– Given some of the significant market moves post the US elections on November 5^th we do expect the market volatility to persist and perhaps increase going into the last quarter of the year as the holiday season approaches. This is when many market players tend to close their positions and take money off the table before they reposition their portfolios in the new year. As this creates an environment of lower liquidity the market fluctuations can increase during this period.

– Investors should remember that markets tend to go up in an escalator, but they do come down in an elevator and when that happens, the losses may be too deep to dig out of. After all, losses and gains mathematically are not symmetrical. Given that the only way to make up for 50% loss is by delivering a 100% return, it is better to take risk off the table when the stakes are high. It is better to give up on the upside than lose the same amount on the portfolio itself.

Turns out the markets predicted the US elections correctly; Donald Trump indeed won his second term as US President while Republicans now have the majority both in the Senate and the House. That is a major win. While markets were betting on Trump, neither the US voters in general nor the world thought he would get in. After all, it is quite rare for a US President to lose the elections and then win once again at a later term. It is so rare that this has happened only once in the US history, by Grover Cleveland, a Democrat, who served as US President from 1885 to 1889 and then 1893 to 1897. There were however others who tried but no one except for Trump and Cleveland ever succeeded. Why is this so important? Because the US voters explicitly communicated that they want change. Hence this marks an important turning point for both the US and the world as this sets the stage for meaningful change in American politics as well as international trade which will have some serious spillover effects to the financial markets.

In fact, we have already seen the shift in global market dynamics with equities and crypto shooting up and some serious volatility in commodities and bonds. This is because markets expect a stronger US economy with lower inflation under Trump, basically a similar environment to the one his administration had created while he was in office in 2016-2020. Whether he will be able to deliver on that is of course another matter, but for the time being it doesn’t look like the excitement in the US markets will subside any time soon, particularly as the markets expect more FED rate cuts.

However, emerging markets and Europe continued to experience some weakness in November. They are still impacted by weak macroeconomic fundamentals and higher inflation.

While the US Presidential election has a put lid on the issue of sticky inflation and weak macroeconomic fundamentals, it still doesn’t change the fact that there is divergence across global macroeconomic activity and monetary policies, which may prove to be painful for the markets in the next little while.

US EQUITIES SPIKED IN NOVEMBER

US equities were fueled by Trump’s economic plans geared towards making US economy more competitive, strengthening the dollar and reducing taxes across the board. The prospective FED rate cuts also helped. As of November 29^th, the US equity index S&P 500 was up by a whopping +5.7% on the month, bringing its year-to-date return to +26.8%. The European stock index on the other hand retreated in November as macroeconomic conditions remained weak. Euro Stoxx 50 was down by -0.5% on the month pulling its year-to-date return down to +6.3%. Global emerging market equity index MSCI EM also had a down month losing -2.7% in November bringing its year-to-date return down to +7.6%. Despite the weakness in Europe and emerging markets the global equity markets indicator MSCI All Country World Index (ACWI) was up by +4% in November delivering +19.7% since the year end.

BOND YIELDS EASED AND PRICES CLIMBED ONCE AGAIN

Since end of April bond prices have been on the rise (meaning yields have been dropping) with the exception of October when bond prices dropped (meaning their yields increased). As we discussed in our previous issue, in October long term expected real rates went up alongside expected inflation which created a knee-jerk reaction in the bond markets. As a quick reminder, while shorter durations are driven by the central bank interest rate decisions, longer term maturities rely more on expected inflation and real rates (in a simplified form nominal rate = expected inflation + real rate).

In November, however, bond yields went down, and the yield curve became more inverted. Just to remind our readers, under normal market conditions, the bond yield curve is expected to slope upward, that is, shorter term yields are lower than longer term ones. In cases where the opposite occurs, that is, when short-term yields are higher than long-term yields, the yield curve is considered to be inverted which means it is sloping downwards. That was the case in November.

In November, the downward shift in the yield curve happened as longer duration yields dropped by more than shorter ones. The graph below illustrates how the shape of the yield curve changed recently and how the longer-term yields dropped visibly in November (see the gray line in the graph) vs. October (green line).

Source: Bloomberg

In line with this drop in long-term bond yields, as of November 29^th, Bloomberg Global Aggregate Bond Index, the Global Corporate Bond and High Yield Bond Index all had positive performance respectively delivering +1.2%, +1% and +1.3% on the month bringing their year-to-date returns to +4.2%, +4.6% and +11% respectively.

CRYPTO CURRENCIES HAD AN AMAZING PERFORMANCE IN NOVEMBER

Trump’s pro-crypto stance and the easing global liquidity conditions had Bitcoin shoot up almost hitting the monumental $100,000 mark. As of November 29^th, Bitcoin was up by a jaw dropping +39.2% on the month, while Ethereum was up by an equally impressive performance of +42.8%. Despite its weak performance in August, Bitcoin has an exceptional year to date performance with +129% while Ethereum underperformed Bitcoin by delivering +57.5% since the end of 2023.

GOLD HAD A VOLATILE MONTH

The approaching US Presidential election on November 5^th and the monetary easing had helped gold climb throughout 2024. At the end of October, the first month futures contract for gold had hit $2800 per ounce and was up by 35.2% year to date. As the uncertainty around the election eased, gold started to unwind a good chunk of its gains and dropped by -8.2% from its peak to $2570 as of November 14^th before climbing back up by + 4.3% closing the month at $2681, making November a very volatile month for gold. After all was said and done, as of November 29^th, the first month futures contract for gold was down by -2.5% on the month pulling its year to date return down to +29.4%.

CRUDE OIL HAD A RELATIVELY QUIET MONTH

As a brief recap, crude oil prices are driven by both demand and supply dynamics which mostly offset each other over the month. As a result, crude oil had a relatively quiet month. As of November 29^th, the first month futures contract for US crude oil WTI was down by -1.1% on the month pulling its year-to-date loss to -4.4%.

TURKISH STOCKS HAD A GOOD COMEBACK

The positive outlook in global equities helped Turkish stock market. As of November 29^tH, Borsa Istanbul Index BIST100 was up by +8.9% in local currency terms (+7.5% in US dollar basis) over the month moving its year-to-date return in local currency terms to +29.2% (+10% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms visibly underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +17.5% since the end of 2023.

INVESTORS SHOULD DEFINITELY CONSIDER TAKING SOME RISK OFF THE TABLE

We previously discussed the repercussions of a potential FED interest rate cut and the approaching US elections and how investors should take this opportunity to reposition their portfolios. We had also noted that this environment could come with increased volatility in financial markets. Given some of the significant market moves post the US elections on November 5^th we do expect the market volatility to persist and perhaps increase going into the last quarter of the year as the holiday season approaches. This is when many market players tend to close their positions and take money off the table before they reposition their portfolios in the new year. As this creates an environment of lower liquidity the market fluctuations can increase during this period.

We had noted in our previous issues that this environment would allow for credit investments, such as corporate and high yield bonds, which are priced off government bonds, to appreciate particularly for longer maturity instruments. This is exactly what has happened. While our longer-term macro view still calls for continued upside to financial markets, with asset prices even more elevated than before, the risk for a market correction seems to be growing. Investors should seriously consider reducing some risk in their portfolios by moving some of their assets to cash while allowing the markets to cool off.

PORTFOLIO LOSSES MAY BE WAY TOO DEEP

Investors should remember that markets tend to go up in an escalator, but they do come down in an elevator and when that happens, the losses may be too deep to dig out of. After all, losses and gains mathematically are not symmetrical. Given that the only way to make up for 50% loss is by delivering a 100% return, it is better to take risk off the table when the stakes are high. It is better to give up on the upside than lose the same amount on the portfolio itself.

ELA KARAHASANOGLU, MBA, CFA, CAIA

International Investments Director

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/