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.
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.
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.
