Three-Way Tug of War: Stocks, Bonds and Gold

Douglas Coté

Equities continue to move uphill, and all signs point towards a successful reopening and a revived economy. Right? That certainly is the assessment of stocks as the benchmarks continue to rise and the S&P 500 now sits about 100 points away from its 52-week high $3,373. But the direction of stocks is not the only arbiter of market and economic health. Let’s look at the bond market, which certainly does not support a “bull market” scenario. At the start of the year, the yield for the 10-year U.S. Treasury — a bellwether of investor sentiment towards the economy — stood near 2%. On Thursday, the 10-year Treasury yield broke below its support and is down to 0.58%. In other words, bonds are signaling bad economy and bad markets ahead.

Gold has hit a nine-year high and shows no signs of slowing down; its cousin, silver, just hits its fourth-highest two-day gain in history, according to Carter Worth of Cornerstone Macro. While this sounds like a positive occurrence, it actually signifies uncertainty in the economy: precious metal prices tend to move inversely to the U.S. dollar and interest rates. The last time gold prices rose this high was in September 2011; a month after the Black Monday market crash, August 8, 2011, which followed Standard & Poor’s Friday night downgrade of the United States’ credit rating from AAA to AA+, the first time in history the U.S. was downgraded.

That downgrade was a consequence of earlier partisan Congressional deadlock on raising the debt ceiling; though resolved, the deadlock raised doubts about the nation’s ability to manage its finances. I wonder how the rating agencies will react to another expected $1 trillion coronavirus rescue package on top of the multiple trillions already spent? For the first time, I am mostly focused on gold. I recall that back around 2011, some observers advocated gold as an "alternative reserve currency," because the U.S. dollar was weakening in reaction to the Federal Reserve’s quantitative easing program. They say the past is prologue, so it might be time to batten down the hatches as we advised in our 2020 forecast. To read our forecast, click on the link here:

https://advisors.voya.com/insights/blogs/global-perspectives/2020-mid-year-outlook-storm-calm-sequel

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