What I Care About This Week | 2023 Feb 6

gold glitter lot
Photo by Achira22 on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • We are in the heart of earnings season, with about half of the S&P 500 companies having reported. Earnings season is pretty lackluster so far, with a decline in profits of about 5%, and the outlook has grown a bit dimmer for this year’s earnings. Last week, the Fed raised rates by 0.25%, and markets now expect two more 0.25% rate hikes — one in March and one in May. The big news of last week, however, was the unexpectedly strong employment figures. The headline unemployment rate dropped to 3.4%, driven by strong hiring in the services sector, and job openings increased by 750,000 openings! Both were considerably stronger than expected.

  • Looking into this week, we have several more big-name companies reporting such as ActivisionBlizzard, Chipotle, Disney, and Kellogg. CEO commentaries and outlooks are becoming more important as analysts are concerned about a potential recession this year. After last week’s data deluge, not much macro-economic data posts this week.

  • Lots of hope has moved through the market, and many speculative bets are back on. That said, other than employment (a key variable, for sure), the economic data has continued to deteriorate. Manufacturing posted lower than expected last week, but was largely overlooked because of the Fed’s rate announcement. Earnings are in bad shape and expected to get worse. Ultimately, I believe caution is warranted in this environment.

The Details

Let’s talk about gold. It’s up about 13% from its bottom in October.

Really, it is the advocates for owning gold that I want to discuss — you know, the “gold bugs.”

Let me be clear up front: gold absolutely has a role in the overall diversification of your investments. It tends to zig when other things zag, and that is very helpful in an investment portfolio. You probably should own at least some gold in your portfolio (and how much will be determined by your goals).

But that is not the typical argument you hear for owning gold. More often what you hear is that gold is the only real money, that it is the only real store of value. Usually, there is the apocalypse argument (“its all that will matter if the world falls apart”) and tied closely to that is the “only own actual physical gold” argument.

How true are these claims?

First of all, there is really nothing special about gold. I’m not sure why it even has value, to be perfectly honest. There are some industrial applications, but you can’t eat gold, you can’t drink it. The reason we hear “it is the only true money” is only because we all believe it has value… so it does. In fact, gold’s appeal may simply be an accident of history and chemistry.

Consider the price of gold since 1981. From 1981 to today gold has increased 210%, which sounds great! Until you also consider that lead has increased 200% over the same period. And both pale in comparison to large-cap US stocks which have increased 2900% in price since 1981 (that isn’t a typo, 2900%). What is so special about gold again?

What about as an apocalypse hedge? We actually have some data on this, believe it or not. We can look at examples of failed economies and determine the utility of gold. New Orleans after hurricane Katrina comes to mind: even then, gold was pretty worthless. What mattered in that environment was food, water, and gasoline. Sure, in places like Venezuela, gold is being used as a currency, but only tiny slivers of it. Anyone with significant stashes of gold are probably more worried about theft than where they can spend it. What we learn from natural disasters and failed economies is that food, water, and gasoline are the currencies that matter.

In any event, owning some gold in your investment portfolio makes since. I would, however, caution most investors from owning significant amounts of the physical commodity. Not only is it expensive to trade and store, but I just don’t see the reason for it.

Gold just isn’t all that special.

Chart of the Week

Market drawdowns can be scary. 2022’s pullback in the S&P 500 saw about a 25% pullback from its peak. Market pullbacks like this come in all shapes and sizes, of course, but the larger pullbacks are rare.

What 2022 just gave us is in the “rare, but expected” category. As this week’s chart shows, drawdowns of 25% or more have happened 9 times since 1950 — that averages to just over once per decade. Rare, but certainly expected. The question, of course, is whether this one will continue (because of a recession), or if the recovery is underway.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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