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Stocks and Bonds and Gold, Oh My!


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I thought it would be instructive to look at the performance of stocks, bonds and gold since the stock market peak in January, 2018, or 20 months ago.

2019-08-12 B

The line graph above shows the performance of the S&P 500 Index from the peak until today.  You can see that the total return is 2.86%, roughly 2% of which is from dividends.  The stock market has gone virtually nowhere in over a year and a half.

The bar graph at the top of the page compares the S&P 500 Index to the ETF for Gold and Long Term Treasury Bonds.  It is clear that the treasuries have won the performance race, with gold putting in a very good showing as well.

Investment Strategy Summary

Last year, I told you that we were getting more conservative in our asset allocation in client accounts, reducing the allocation to stocks and increasing the allocation to gold and bonds.  I wrote our reasons why – in a nutshell, gold and bonds are a hedge against stock market volatility, and given the over-valued levels of the stock market, we were expecting volatility. Over the past 20 months, our clients with an investment objective of 100% Stock Allocation have experienced returns more than double (and more than triple in certain of our strategies) the stock market return simply by diversifying and hedging with other asset classes at the right time – when the stock market was overvalued and the economy was beginning to slow.

At the present time, I see no need to lower our allocation to bonds and gold in favor of stocks until we see equity valuations more in-line with historical averages.


The economic numbers continue to be mixed, with the bond market pricing in three rate cuts in 2019.   The Fed cut rates on July 31st by 0.25% and the fed fund future market is expecting another in September and in December with additional cuts in 2020.

There are a number of recession indicators that point to a possible recession within the next year – many of those indicators coming from the Federal Reserve itself.

Bond Market

Over the past several weeks, the trend in yields at the middle and longer end of the yield curve has been down, inverting the yield curve below short-term rates.  After a brief un-inverting of the curve, we are back to the most sizeable inversion since 2007.  The ten-year bond yield is at 1.63% and the thirty-year bond yield is at 2.11%.  The Federal Reserve Chairman made a speech with his rate cut announcement and indicated it might be a “one-and-done” rate cut to just reverse the one from the Fall of 2018.  The bond market reacted by strengthening at the longer-end of the yield curve, driving down rates to where we are today.  It clearly does not buy the one lonely rate cut scenario and anticipates further.

Stock Market

Even though the stock market rallied to new all-time highs prior to the rate cut announcement, a “sell the news” reaction to the one-and-done statement has sent the market down in early August.  The S&P 500 is down 3.28%, the NASDAQ is down 3.86% and the Russell 2000 Small Cap Index is down 5.09%.  The relative strength index for the S&P 500 is approaching over-sold readings, at which point we will probably get a bounce higher.  But the severe reaction of the bond market indicates it will be short-lived.

Macroeconomic Issues

The macroeconomic  issues discussed in the previous Market Outlook continue to be of concern in their current and potential impact to the economy and financial markets.  They are, in short:

  • Tariffs hindering economic activity and increasing inflation
  • Earnings estimates are being cut
  • Personal, corporate, and government debt bubble
  • Government Debt Ceiling on September
  • Fiscal Policy limited due to high levels of deficit and debt plus the tax cut has already been implemented
  • Growing acceptance of Modern Monetary Theory, negative Fed Fund rates, and pegging of bond market yields
  • Illegal Immigration putting pressure on viability of social safety net
  • Legal Immigration system needs overhaul to focus on increasing the number of visa going to skilled workers
  • Demographics in the western world are deteriorating, with few than required young people than needed to sustain social programs and economic growth
  • A Solar Minimum Cycle of Sunspot activity leading to cooler and wetter weather, brief extreme heat waves, reduced crop productivity, volcanic and earthquake activity
  • Leading economic indicators flashing warning signs of recession
  • Negative Interest Rates in USA

As recently as this Spring, no one was seriously discussing negative interest rates in the USA.  However, in early July, the Fed Chair gave a speech indicating that they were a possibility to ward off recession.  I’ve added it to my list of Macroeconomic Issues because in my opinion negative rates would be a financial disaster.

More on all of this in the next blog post!