Something About Gold

In my February newsletter (The Most Important Market Cycle to Watch) I warned that stocks were entering into a tumultuous phase that could last for the next 18 months. The timing was almost perfect, but I wish that I wasn't right.

I've shared with many clients my thoughts about a honeymoon period for President-elect Trump. After that time, he would be under increased scrutiny and skepticism.

The trigger was Trump's promise of retaliatory tariffs for every country on the globe, including many close allies for the US.

Since mid-February, the S&P 500 plummeted -19%, putting it at the lows of May 2024. Looking at the very real risks of a bear market, Trump announced a 90-day pause for most tariffs. Markets rejoiced, gaining nearly +10% in a single day. Big swings are just a Tweet away.

Smart money has been keeping cash on the sidelines or betting against the market. Many hedge fund managers were taken by surprise on last week's rebound and forced to sell their US Treasury notes to meet margin calls. As a result of these forced liquidations, 10-year Treasury yields rose from 3.9% to 4.5% in the course of a week. (While the Federal Reserve is responsible for setting short-term interest rates, the market controls the rates for longer-term maturities. A rise in bond yields comes from a drop in bond prices.)

Meanwhile, the US dollar went into free-fall. Against a basket of global currencies, the dollar went from a value of $110 to below a major support level of $100.

The bond market is starting to worry too, as investors are demanding higher yields for lower-quality debt.

There was only one big winner in this market... gold. The classic hedge against inflation and instability has done very, very well. Gold prices are now up +22% for the year.

Putting this all together...

Markets are more connected and more responsive than ever before. Everything is accelerated. Moves that used to take an entire month now happen within the course of a day.

But last week's rebound is likely to be a "head-fake". Just when it looks like the market is heading in one direction, it changes course. A short-term rally in stocks could just be a short-term rally. Let's not get suckered into it.

What we think we know...

1. Investors in the stock market will have something to worry about for months to come. While it takes just a day to raise tariffs on 100+ countries, it will take 100+ days to renegotiate them all.
2. Safe, dividend-paying stocks make a lot of sense for now.
3. Tariffs lead to higher prices and sometimes supply shortages. Consumers pay the bill. Expect inflation to rise over the next few months to years.
4. Higher inflation makes the Federal Reserve less likely to reduce interest rates.
5. Inflation may weaken the value of the dollar. As such, we've been increasing our exposure to non-US stocks.
6. Foreign governments may reduce their investments in U.S. Treasuries, increasing our government's cost of issuing debt. Last year, the federal budget deficit was 6.4% of US GDP. By 2028 that number could be over 10%. It doesn't end well.
7. Of course, all of this could change at a moment's notice.