Investment Research
Once again, gold finds itself stuck below its former highs. Will the long-awaited breakout ever materialize?
Jerome Powell and his friends raised rates for a tenth consecutive meeting yesterday. That wasn’t a surprise. Neither was it surprising when Powell laid the groundwork for a pause in hikes, removing language from the prior meeting’s press release that indicated additional policy firming would be necessary, and replacing it with more flexible language that highlights the Fed’s data dependence going forward.
From 1990 to 1999, gold prices dropped by 40%. Over that same period, stock prices quadrupled. If Twitter was around back then, I bet the sentiment back then would look pretty similar to the kind of things we see and hear today: “Only old people and conspiracy theorists hold gold. Why would you hold a non-productive asset when you could own a piece of this high-flying growth stock or this new, disruptive technology?” And given the performance of gold vs. stocks over the last decade, who can blame them? Gold has gone absolutely nowhere since its 2011 peak. The S&P 500 has risen 250%.
The relationship between the US Dollar and stocks was the only thing that mattered in 2022. Each time the Dollar rose, stocks fell. And each time the Dollar retreated, equities got a reprieve. That relationship is back in force in 2023.
By the middle of January, the US Dollar Index was down than 10% from its September peak. The move pushed the index below its 2016 and 2020 peaks for the first time in nearly a year – a heartening development for equity market bulls, who watched Dollar strength wreak havoc on returns in 2022. The downtrend continued as we moved into the second month of the year, and the first trading day of February brought with it new lows for the index. All seemed well.
Interest rates dropped in January, providing fuel for the equity market rally and setting the stage for growth stocks to outperform their value counterparts. The correlation between stocks and bonds is nothing new – it drove market all throughout 2022. Check out how closely the two moved together last year:
The bear market for bonds that began in 2020 looks set to continue in 2023. The swing lows from last summer acted as resistance in November/December, and now 10-year Treasury futures are approaching their lows from the fall.
The rally in stocks has been supported by weakening US Dollar. All year, the Dollar index has been the impetus behind stock prices, with each successive high in the world’s reserve currency driving stocks to a new low. Check out how closely the two have moved together, and how closely they continue to track while equity prices have risen:
The Dollar’s weakness relative to the Euro – which comprises the majority of the Dollar Index – has brought the EUR/USD cross back to the bottom end of its 5-year consolidation range.
Here’s a closer look at the action:
Continue reading “December FICC Outlook – Unlocked”The bull case for stocks still rests on the backs of the US Dollar and interest rates. The Dollar showed its first signs of weakness in months when it (barely) fell through a prior swing low. That’s been a major tailwind driving stocks for the last few weeks, and the outlook seems pretty simple. If the bottom is in for stocks, the top is in for the Dollar.