Submitted by Eric Bush via Gavekal Capital blog,
Most of the time not a whole lot actually changes in the markets over the course of a month. For example, small cap stocks tend to outperform large cap stocks by a rather mundane 31 bps over the course of a month on average going back to 1996. There are, however, periods of time when extreme moves do occur over the course of a month. We have just experienced one of those times.
A three standard deviation price change is a pretty rare event especially outside of a crisis period. The US presidential election has clearly been that rare event catalysts. In the charts below, we have identified five different examples of a three standard deviation 1-month price change in four different asset classes: equities, commodities, fixed income, and currencies.
In equities, we have experienced an extreme move in the relative price change between small cap stocks against large cap stocks. As of 12/8/2016, the S&P 600 had outperformed the S&P 500 by over 12% over the previous month. This was the best 1-month outperformance since March 2000 and the first positive three standard deviation move since 2002.
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Also in the equity market, the relative performance of the KBW Bank Index against the S&P 500 also created a three standard deviation 1-month price move. The bank index outperformed the broader stock market by 17% which was the most since 2009. This is the first time such an outperformance has occurred without the US economy either being in or being on the precipice of a recession since 1993. Even with the impressive performance recently, the KBW Bank Index has significantly underperformed the S&P 500 since 1993 and continues to look like it is locked in its post-GFC trading range.
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In the commodity market, the copper to gold ratio spiked by over 35% over the course of a month. This was the largest 1-month relative price change since April 2009. The copper to gold ratio usually only changes by about 43 bps over a month going back to 1987.
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In the currency markets, the Japanese yen has had the third largest 1-month sell off against the USD going back to 1973 and it is just the sixth three standard deviation sell off during this time. The yen has actually been more likely to experience a three standard deviation rally against the USD over the last four and half decades.
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Last but certainly not least has been the sell off in US 30-year bond yields. An extreme move in yields has become much more common since the financial crisis. Prior to the tech bust, we actually never had a three standard deviation 1-month change in yields. We had two such moves between the tech bust and the financial. And since the financial crisis, we have had 11 such moves.
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