With all due respect to the character Dorothy in the Wizard of Oz, the title of this article really does illustrate the mindset of investors right now. Fear is permeating their thoughts, and they are wondering where to invest now. Should they pull the plug after a prolonged bull market in bonds and stocks and just buy gold and other precious metals?
Their concerns are not entirely unwarranted. Bonds have been in a generational bull market, rising sharply since the early 1980’s and with little inflation to speak of. Stocks rose consistently in the seven years following the financial crisis in 2008. Meanwhile, gold has had its moments in the sun. It peaked a few years back, tumbled down, and now it’s back in style. We have started to see some inflation come back into global economies, albeit small. What trends should we look for if we see little growth and some inflation?
Let’s take a look at each asset class and see if investors’ worst fears will come true.
Lately we have seen a move toward bonds, and as a result, yields have dropped sharply. Some inflation is coming into the system thanks to rising metal, crude and other commodity prices. If there is one thing bond investors hate, it is inflation. So, bonds are going up? What gives? It depends on who you ask. A divergence of opinion has arisen on whether growth is going to accompany inflation (often times it does, and when it does, bond yields rise).
In this case, the bet by the bond market is not the same encouraging message from the Fed. However, if yields drop too much (nearly 1.7% on the 10 year bond), risk becomes too high for fixed income portfolios. A move to an alternative class may take hold (this happened in early February when money moved from bonds into stocks).
Stocks have enjoyed a solid run since February, only recently giving up about 3% of a very sharp 14% gain over a 10 week period. Breadth has started to weaken, put/call ratios are rising, and the McClellan oscillators/summation index have rolled over. Are we looking at the death of equities? Heck no, but we have to be cautious and have one hand on the door just in case.
Finally, gold has dusted off some the bearish sentiment over the past couple of years and has been a stalwart asset class in 2016. The GLD ETF is up more than 20% so far this year, looking to stretch out those gains. That would be tough to do, but the metal is showing some great momentum to the upside.
The perception of higher inflation has been good for gold, and a drop in the dollar certainly hasn’t hurt either. But the Fed will only tolerate so much inflation, and they still control the game board. Hence, the rise in gold and other commodities may have “front run” the markets here, where the easy money has already been made. That said, late investors may be coming in as they gravitate to the “whatever is hot” play – always a dangerous move.
So back to our original question: Where to invest now? And what does all of this mean for your portfolio? Nothing, as it’s all speculation about possible new trends being made. Pay attention. Bonds and stocks could go either way, and if panicked investors rush to gold, the overall market will be affected. Is this a reason to worry? Until a new trend is confirmed, no.
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