Last week, we released the Commodities section of our 2020 Outlook report.  We highlighted that 2019 has been a mixed year for commodities with plenty of losers and winners.  While energy commodities have generally done the best—with the exception of natural gas which has been the biggest loser in the space—gold has been another notable winner having its best year since 2010 with the seventh-best return YTD of the commodities in the Bloomberg Commodity Index.  The yellow metal is also just one of four commodities that have delivered a positive total return over the past five years while the broad index has fallen 4.64%.

Similar to other commodities, gold prices are susceptible to long term trends in price movements. The 1970s inflationary episode saw massive increases in prices, before surging real interest rates in the late 1970s and early 1980s drove down gold prices dramatically.  After doing almost nothing for the next decade and a half, prices rose almost ten-fold.  The post-crisis precious metals collapse cut prices almost in half but have been rising more recently. 2019 saw price sharply increase, especially after taking out the critical multiyear resistance around $1350-$1400.  This year, gold has been an almost perfect proxy for short term rates, rising as the Fed got more dovish in the middle of the year before reversing as the Fed ‘s tone also turned around in Q4. Click here to join Bespoke Premium with a special offer and gain access to our full 2020 Outlook report.

The full publication of our 2020 Outlook report will be available this Friday (12/20), but below is an excerpt from the “Washington” section, which we published last week.  To view this section immediately and receive the full Outlook report in your inbox later this week, sign up for a Bespoke Premium membership using our 2020 Outlook Special.

Bloomberg’s weekly poll of consumer comfort allows us to see how sentiment breaks down along political party lines.  Below is a chart showing sentiment for Republicans and Democrats using Bloomberg‘s Consumer Comfort reading going back to 1990.  In 2019, Republican confidence stood at some of the strongest levels since at least the 1990s.  Given all of the polarization and butting heads in politics, you might expect the opposite to hold true for the confidence of Democrats. But in 2019 confidence among Democrats actually reached its highest level since 2000, although the upward trajectory has not been nearly as strong as that of Republicans; as could be expected when the opposing party occupies the Oval Office.  The reading for Democrats is much higher now than it was at this point in Bush II’s Presidency.

Although both sentiment levels were strong in 2019, the spread between the two leans much more in the right’s favor. Albeit, the spread is also much lower than it was just over one year ago. But even at that peak earlier in President Trump’s term, that is not when Democrats and Republicans were most polarized.  During the George W. Bush administration, the confidence spread reached as high as 45 percentage points. That is a nearly 8 percentage point difference from the recent peak of 37.7 in September of 2018 and about a 25 percentage point difference from the current level of the spread.

Friday’s retail sales report, which we discussed in a B.I.G. Tips report, was a disappointment with the headline and core readings missing forecasts.  In spite of this overall weakness, one area of strength continues to be the Non-Store category.  This essentially encompasses any online retail whereas the General Merchandise category includes retailers like physical department stores.  For the past decade, shopping in brick and mortar stores has been steadily declining with online shopping picking up the slack as it has since the 1990s.  Late last year, Non Store sales overtook General Merchandise for the larger share of sales for the first time ever.  General Merchandise now only takes up 11.28% of retail sales which is a record low while the Non Store category takes up a record high of 12.89% of total sales.

As the dispersion between online and physical shopping continues to widen, Non Store sales have actually become the second largest category (as a percentage of total sales) of Retail Sales behind only Motor Vehicles & Parts, which takes up over 20% of sales as shown in the chart below.  Online retail not only takes up a larger share of the total pie than General Merchandise, but it’s also larger than sectors like Food & Beverage Stores and Bars & Restaurants.

Another interesting dynamic has been the tendency to eat out rather than in.  The November report showed 12.35% of sales from the Bars & Restaurants (eating out) category compared to 12.39% from Food and Beverage stores (eating in).  The spread between these two categories has continued to narrow recently, and it’s only a matter of time before “eating out” overtakes “eating in” at this point.  Start a two-week free trial to Bespoke Premium to access all of our B.I.G. Tips reports, Annual Outlook Report, interactive tools, and much more.

While the price-to-earnings ratio is perhaps the most common valuation metric, the reverse of the ratio is another way to gauge valuations. Called the earnings yield, this is calculated by dividing earnings by price rather than the other way around which would result in the P/E ratio. In the Valuation Section of our Annual Outlook Report released last week, we took a look at the S&P 500’s earnings yield relative to corporate bonds. An excerpt is below.  To view the entire section and gain access to all of the other sections (plus the rest of our research offering), join Bespoke Premium with this 2020 special offer.

Comparing the earnings yield of the S&P 500 to the yield on the 10-Year US Treasury (a so-called risk-free asset) has the potential to be an apples to oranges comparison as stocks are considered a risk asset and treasuries are considered a ‘risk-free’ rate of return. To help take that into account, the chart below compares the earnings yield on the S&P 500 to the yield on corporate bonds using the average yield of Moody’s AAA and BAA corporate indices.

The earnings yield of the S&P 500 relative to corporate bond yields is currently right inline with its historical average. Looking back at this relationship over time, pre-1960 this ratio was much higher than average. Then, it was much lower than average for the next 50 years. In the last decade now, the ratio has stayed pretty close to its historical average. Not too hot. Not too cold.