Market shrugs off doom while investors show preference for gold over stocks — what gives?

— We’ve seen this movie before … gold did ok, but what about stocks?

— The last time we saw this preference for gold was 10 years ago. Why?

— Waiting for the last shoe to drop is not a recipe for market success.

— Markets are forward looking … This is an essential concept!

We’ve seen this movie before

In fact the last time we saw it was in 2013, according to an article in Business Insider (“Americans view gold as a better investment than stocks for the first time since 2013 …” May 19, 2023).

Why was gold preferred over stocks in 2013? We were working our way out of the 2008/2009 financial crisis. Unemployment, which had been at 10% at the peak of the ensuing recession, was naggingly high at 7.5% (June 2013). Although GDP grew at 4% in 2012 it had begun to slow in 2013 (actually still not bad +3.4%). In the minds of many however the place was too slow and any progress that had been made would be blown apart by the provisions of the Budget Control Act of 2011 and a Fed eager to taper Quantitative Easing. Because (as usual) Congress could not agree on what programs to cut, and by how much, it was decided to cut everything a certain percentage (the dollar amount was $85.4 billion per year starting in 2013 instead the actual 2013 amt. was -$42 billion) through 2021. Were it not for the intervention of Covid the total cuts would have amounted to close to $1 trillion. This was The Dreaded Sequester (I posted about it at the time).

Many had already felt our economic progress was too slow even though the numbers above were ok considering the economic trauma we had faced. CPI inflation in 2013 was running at only 1.46%. It was felt that the potential drag from the sequester along with higher interest rates (The Dreaded Taper of QE) would throw us back into recession or worse.

The Sequester and Taper were front page media features and not in a glowing, positive way. It is no wonder that the safe haven appeal of gold had investors preferring it to common stocks. This was especially true because of the close proximity that these two concerns surfaced versus the timing of the financial crisis and great recession.

I think we all know how that extreme insecurity was rewarded.

First and foremost in 2013 the S&P 500, which peaked in March of 2000 at 1550, broke out of a 13-year trading range, hitting a new all-time high in the spring of 2013. In the subsequent 10 years the S&P (4192-5/19) hit a record high of 4818 (up 186% from its June 2013 close). Gold during the same period rose to its record price (approx. $2055$ per ounce) + 55%. Gold did not pay dividends. The S&P did. My return numbers do not include the distributions.

A more important point must be considered here. This is that the prior period in 2013 where investors showed preference for gold over stocks was extremely fraught, just the period we are currently facing today. As the author of the above (“Americans view gold as a better investment …) article astutely points out this fear, this negative sentiment, is a good thing. You never see this at a market top but always find it near market bottoms.

Waiting for the last shoe to drop

There is a pervasive thought process in the market today (probably always around in some form), definitely fostered by the media, that investors should not be buying or even involved in the market until hard evidence of an economic slowdown is in place. That evidence might be a sharp increase in unemployment or a precipitous drop in industrial production. This waiting for the last shoe to drop is bogus for two reasons: one, the market is forward looking (parsing today’s data to determine tomorrows prices) and two, human nature — most people are not buyers when prices skid because they fear that they are going lower. At the lows the media will provide you with loads of reasons why you should remain on the sidelines. This idea of cause and immediate effect encourages trying to time the market and in IMHO is a cause of significant underperformance by many investors. 

Key Concept: The market is forward-looking

There are contributors and SeekingAlfa subscribers who continue to hold the belief that we must actually wait until the economic statistics turn awful, until evidence of a recession is staring us boldly in the face, before it is safe to get back in or invest additional amounts in stocks. Interestingly, many of the same people in the face negative headlines (a la 2013) were advising caution, anticipating a negative outcome in the face of a breakout to new all-time highs in the S&P 500 (the beginning of a new secular bull market). They turned out to be wrong.

To those who are advising us to ‘wait’ for a full-fledge recession I will reiterate, THE MARKET IS FORWARD LOOKING. I believe that recession was price in fully in October of 2022.

The Dow Jones Industrial average, S&P 500 and NASDAQ made record highs respectively at the following levels: 36952.65 (1/4/2022), 4818.62 (1/4/2022) and 16212.23 (11/22/2021). As the Fed began to ratchet rates up in March last year the indices began to falter. They made simultaneous lows October 13, 2022, as it became crystal clear that the Fed meant business to kill inflation, even if it meant throwing the economy into recession. These declines from their peaks measured: -22.4% (DJII), -27.5% (S&P) and -37.8% (NASDAQ COMP.). Those numbers indicate to me that we have already experienced a cyclical bear market anticipating a recession that has yet to really bite (unemployment still at 3.4%). To those of you waiting for it to bite before re-entering the water I ask, what if it doesn’t bite? What if a recession, if it occurs, is milder than expected and inflation moderates more rapidly? What if the market is right?

Nonetheless, I believe it is critical that if you are trying to time the market (which I do not advise) you need to realize market is not looking in the rear view mirror (as many investors tend to do) but it is try to determine, using the collective opinions of all the participants, where prices will be six months or a year from now.  Here is a little food for thought from Barron’s this weekend: Stock Market Shrugs Off Doomsday Scenarios. It Might Be Right. (you will need a subscription to WSJ or Barron’s to view)

The market shrugs off doom. What gives? … Extreme Pessimism and that’s a good thing you don’t normally see at market tops!

Anyway, that is my best shot for this week. What is yours?

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