With all due respect to Dorothy from the Wizard of Oz, the title of this article should tell us we have some worries and fear about investing in different asset classes. To be sure, there is some fear permeating, investors are wondering if they should pull the plug after prolonged bull markets in bonds and stocks, or just buy gold and other precious metals. Equities have enjoyed a bountiful time since the financial crisis, a bullish run of seven years literally uninterrupted (on a longer time frame).
Bonds have been in a generational bull market, rising sharply since the early 1980’s and with little inflation to speak of. Gold has also had its moments in the sun, peaking a few years back but it has come back in style for 2016. We have started to see some inflation come back into the economy around the world, albeit small. What trends should take place if we see little growth and some inflation?
Lately we have seen a move toward bonds, yields dropping sharply. But we just stated there is some inflation coming into the system, with rising metals, crude and other commodity prices. If there is one thing bond investors hate it would be inflation — nothing else matters. So, bonds are going up? What gives? Simply put there is a divergence of opinion here on whether growth is going to accompany the inflation (often times it does, and bond yields would 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) then we assume risk is too high for fixed income and a move to an alternative class may take hold (this happened in early February, money moved from bonds into stocks).
Stocks have enjoyed a solid run since the bottom of 2016 this past 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. The death of equities here? Heck no, but we have to be cautious and have one hand on the door just in case things happen as I pointed out here.
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.