Sell-Off Demonstrates the Stock Market Is NOT the Economy
Posted By | February 9, 2018
One of the most common misperceptions held by the public is that the stock market is the economy and vice versa. Not true.
As a matter of fact, they are frequently opposites, as the recent – and massive – backslide in the equities markets once again proved.
It’s not that the stock market isn’t a component of the economy; it is. But the best interests of the stock market frequently can differ from those of the overall economy. As Bob Collins notes at Minnesota Public Radio’s Newscut website, “The U.S. economy added 200,000 jobs in January, according to the Bureau of Labor Statistics. Economists predicted 180,000. That’s good. Except for the stock market.”
It was precisely a spate of good economic news that prompted the Dow Jones Industrial (DJIA) Index to fall from a high of 26,616.71 on Jan. 26 down to 24,345.75 by the close on Monday, Feb. 5. In a span of just 10 days, the most recognizable benchmark in all of investing dropped a whopping 8.5 percent on the heels of robust economic news.
Good news for the economy is oftentimes bad news for equities investors. It typically breaks down this way: Good news means higher interest rates, and higher interest rates are bad for the stock market because the cost of doing business for both businesses and consumers goes up. As the old adage goes, “Bull markets don't die of old age; they are killed by higher interest rates.”
Another reason higher interest rates are bad news for stocks is that increased yield in debt securities and bank instruments can result in a flight away from less reliable equities and toward safety.
So how does this better financial picture affect gold?
Because improving economies tend to be bad for markets, equities investors frequently will look to gold as a safe haven. But there’s more. Despite the casual perception that higher interest rates are always negative for gold because it offers no yield, a closer look at the data finds no true historical correlation exists between rising interest rates and declining gold prices. As an Investopedia article details, a review of the relationship between gold and interest rates from 1970 to 2015 indicated a positive correlation between the two just 28 percent of the time.
There are several examples throughout history of gold prices bucking the trend of interest rates. One of the most notable occurred during the 1970s when interest rates soared throughout the period that came to be known in the U.S. as the “Great Inflation.” Short-term rates rose from 3.5 percent in 1971 to 16 percent in 1980, but gold also climbed significantly from $50 an ounce to $850 per ounce.
This reality underscores our view that gold should be seen as a core portfolio asset rather than one to rotate out of and back into based on the rapidly changing and often wildly unpredictable influences in the current investment environment.
Fortunately, the gold and silver specialists at Augusta Precious Metals are well-versed in the factors that can exert pressure in either direction on the prices of those metals. If you are interested in learning more about the ways in which gold and silver could help maximize your portfolio in a variety of economic conditions, I encourage you to give Augusta a call at 855-242-4121.
It is important to act as soon as you feel ready. Economic conditions can change suddenly, and the potential portfolio-buffering effects of gold and silver could be lost if an investor is not already positioned in precious metals at the very moment those conditions shift.
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