It's a mixed up, muddled up, shook up world
Taking a brief rest from practising my guitar 'skills' for the next instalment of the Ravenscroft band, I have these Lola lyrics on my mind as I try and make sense of the markets this week.
It has struck me, not for the first time, that when uncorrelated markets move in a correlated way, it tends not to last for too long. What do I mean? Well, this last few weeks both gold and equity prices fell a bit, then rallied a bit, almost in lockstep with one another, which is not the historic norm. Commentators have been coming up with differing explanations for the performances of both asset classes.
Interpretations of the US Federal Reserve's recent interpretation of the current outlook for US and global economic fortunes might be considered most to blame for the mixed messages, it seems. Consensus appears to agree that there may be no US interest rate increases until at least the end of 2023 and no tightening of policy there until inflation registers at more than two per cent in the US for, as Jerome Powell puts it, "some time”.
This shift towards a more dovish long-term stance should be good for gold (as it takes away one worry for gold investors that, as the metal pays no income, there is an opportunity cost of holding).
However, “despite the fact that the Fed was quite dovish, it would seem that for the gold market it wasn’t dovish enough,” said Bart Melek, head of commodity strategies at TD Securities in a recent article*. “There is concern that with no more quantitative easing, there might be less momentum for gold.”
Hold on a minute, who said anything about an end to QE? Well, you see, the Fed also stated that it expected a faster economic recovery than previously forecast, with unemployment falling more quickly than it had expected in June. According to the median Fed forecasts, US output will contract by 3.7 per cent this year, compared with its June estimate that it would shrink by 6.5 per cent, with unemployment falling to 7.6 per cent by the end of the year, compared with its previous estimate of 9.3 per cent joblessness. So all is well and markets don't need any further (noting that, at the moment, the Fed is purchasing US government securities at a pace of $120bn per month) support?
Not necessarily, others argue. Whilst the US economy has bounced back faster than the Fed predicted at the outset of the coronavirus crisis, the recovery is still far from complete and vulnerable to the uncertain health outlook. This has prompted Fed officials to debate ways to reinforce their support for the economy, rather than begin to withdraw it. Indeed, in a press conference following the announcements, Mr Powell said the forecasts assume some additional fiscal stimulus from Congress.
“More fiscal support is likely to be needed,” he said. “There are still roughly 11 million people out of work. A good part of those people were working in industries that are likely to struggle.”
Confused? So are most of us, to be honest. Without clear direction, data and any sort of idea of just when 'normality' might resume, all financial markets look vulnerable to further volatility: with the S&P500 flirting last week with a 10% correction from its highs earlier in September, for example!
I don't think that it has been a better time to stick to your investment knitting, stay diversified and know what you own and why you own it ... as usual, do ask us if you have any questions on your own current portfolio.
*Gold falls after US Fed dampens hopes for more stimulus - cnbc.com, 17th September 2020