Recession Fears Fade – Gold and Bonds Stabilize

When the Fed first started hinting at a rate cut back in the spring, gold was trading below the $1,300 level. As things heated up in the trade dispute between the U.S. and China, three things happened—stocks fell, bonds rallied, and gold rallied.

From the end of April through the end of May, the S&P 500 fell 6.5% as investors were spooked. When investors get spooked, they seek safety and many investors look to two areas when seeking safety—bonds and gold. The iShares 20+ Treasury Bond ETF (NYSE: TLT), a barometer for long-term government bonds, gained 6.9% from the end of April through the end of May.

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Gold didn’t rally immediately at the beginning of May, but it started rallying toward the end of May and it jumped from a low of $1,269 on May 21 to a high of $1,442.90 on June 25—a gain of 13.7% in just over a month. The rally stalled for a few weeks but then picked up steam again and gold ended up jumping all the way up to a high of $1,566.20 on September 4. That is a gain of 23.4% in three and a half months.

Since that huge jump, gold has settled down considerably. As of November 7, it was trading back below the $1,475 level. The Fed has made three rate cuts in the last few months and that seems to have helped calm investors.

The funny thing is how the various asset classes reacted after the rate cuts. Stocks have rallied quite nicely since the beginning of June with the S&P gaining over 10% even with a pullback toward the end of July and into August. Bonds rallied sharply from May through August, but they have settled a little now as the Fed appears to be at the end of the rate cutting cycle. Gold rallied from late May to the end of August, but has since pulled back a little.

Now I have to admit that I found this chart by accident. I went to look at a performance chart where I could compare the returns for the S&P, gold, and bonds since the beginning of May. However, the default setting for the performance charts on Stockcharts.com is for the last 200 days. Before I could change the date range to June 1 through the present, this chart caught my eye.

Over the last 200 days, gold has gained 16.67%, the S&P has gained 16.44%, and the TLT has gained 16.22%. Now these stats are through the close on November 6 and don’t reflect the big drop in gold on November 7, but I thought the performance chart was rather remarkable—the parity in the gains was incredible.

I have heard many financial media personalities talk about the “everything rally” and this chart really depicts how these different investments have performed back to January. Yes, they have all gotten to where they are with very different paths, but they have all ended up in the same place—at least through this particular 200-day period.

Moving forward, I don’t see these asset classes moving together much longer. Stocks are looking better as corporate profits haven’t dropped like so many thought they would. Recession fears seem to be subsiding as job growth has remained strong and the U.S. GDP numbers are a little lower, but the economy is still growing.

If indeed we have averted a recessionary period, the safety of bonds and gold won’t be as attractive to investors and we could see them continue pulling back a little. I don’t see big plunges in bonds or gold, but rather I see them kind of drifting lower for the next few months.

Of course the current domestic political environment and the different political storms around the globe could disrupt the current investor calm. There are ongoing political protests in Hong Kong, France, Chile, Indonesia, and other countries. There is still the matter of Britain exiting the EU and how that is going to work out.

It is a really interesting time to be a stock and market analyst. I have been doing this for almost 20 years and don’t remember seeing anything quite like it.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

One comment

  1. Solution: ‘Peach ’45! Isn’t that the solution to all the world’s troubles, Pendergraft, even ones that he didn’t create outside of the U.S.? Now, you’re saying company profits are looking better than forecast, recession fears are subsiding and the economy is growing. Yet, you still want to impeach the President without impeachable offenses and not give him a least a modicum of credit or at least give him a break?

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