Bull Markets, Bear Markets, and a Tradition Unlike Any Other

by Shawn Narancich, CFA Vice President of Research

There’s Always a Bear Market Somewhere

As good as things have been lately for stock investors, who witnessed blue chip averages reach new highs again this week, gold bugs are licking their wounds from recent selling pressure that has plunged the yellow metal into a bear market. Behind this selloff, several key factors appear to be at work:  1) a plunging yen is driving the Japanese to scour their attics for gold to sell, gold that is priced in dollars and converted at ever higher rates into a weak yen, 2) a stronger dollar, which tends to correlate negatively with the price of gold, and 3) at least one major brokerage firm downgrading its price outlook. What’s unique about gold and what makes it particularly challenging to price, is that very little of its demand is tied to cash flow generating activities. Unlike industrial metals, energy, and grain commodities, whose prices are determined by the economics of a business cycle, most of the demand for gold comes from its primary uses in jewelry and as a store of value. Paradoxically, the determination of an increasing number of global central banks to do whatever it takes to stimulate economic activity has led to decreased demand for gold.  Instead, investors increasingly see the merits of investing in cash flow generating investments advantaged by expansionary monetary policy. Nothing like a good bull market in stocks to make gold bugs wonder why they own so much of the stuff.

Spring Swoon?

In the real economy, surprisingly poor retail sales in March confirmed for investors that last week’s lackluster employment report was more substance than exception. Sales declines at department stores and general merchandisers underpinned a 0.4 percent decline in overall retail sales compared to February. While colder than average weather probably explains some of the drop, the data dovetail with the tepid rate of retail job creation in March. Confirming the recent softness of economic data was a bigger than expected drop in the producer price index last month. Fishing even further upstream, one can observe a recent softening in bank loan surveys confirmed by weaker mortgage loan production reported at both Wells Fargo and JP Morgan, the first banks to report Q1 earnings earlier today. While the wealth effect from higher housing and stock prices remains a key support for the U.S. economic expansion, economists appear to be correct in forecasting a slowdown in GDP growth from the 3 percent rate forecast for Q1.  Amidst a weaker tenor of economic data, Treasuries have caught a meaningful bid, and in less than one month, the yield on the benchmark 10-year security has fallen from over 2 percent to 1.73 percent today.

I Had a Laptop Once

While investors have become used to hearing bad news about the PC market, this week’s data from industry observer IDC was attention grabbing. Increasing adoption of tablets and smart phones is putting a tighter squeeze on personal computers and laptops, demand for which fell a staggering 14 percent in the March quarter. Put into perspective, these are the poorest numbers to see the light of day since IDC began collecting the data in 1994. Much to the chagrin of the old WinTel juggernaut, Microsoft’s latest operating system Windows 8 appears to be hitting the market with a thud. Not only are consumers shunning the new software, but enterprises appear to be running the other way as well, loathe to make the cost and time commitments necessary to train workers on a new touch-screen interface.

A Tradition Unlike Any Other

As golf fans revel in the magic of Augusta, investors among us are gearing up for the first full week of Q1 earnings season next week. They will be looking for management commentary on the current state of business and what that may portend for the remaining three quarters of the year. Next week will bring key earnings reports from a range of blue chip stalwarts like General Electric, Kimberly Clark, McDonalds and Verizon.

Our Takeaways from the Week

  • As stocks continue to soar, gold has entered a bear market
  • Economic data has softened, putting a meaningful bid back into Treasuries