U.S. and Global Stocks
COVID-19 fears have given market participants the biggest weekly decline since 2008, and a lot of uncertainty remains. As we navigate current events for our clients, we are analyzing data to understand whether we are witnessing an interruption of a continuing trend, or the arrival of a new trend. For now, we believe, the balance of data suggest the former. We do not believe that COVID-19 related volatility is done, but we are patiently looking for bargains that may be in the process of emerging, to buy strong growers and, potentially, strong dividend yielders, as current events run their course. We are also watching to see if events will take a direction that warrants a more enduring defensive stance.
Strong moves in interest rates, and changing market views of the trajectory of Federal Reserve policy, will necessarily factor into an analysis of some of our favored options for current yield. Of course, this situation is also dynamic, and will change as the market develops a more settled view of what’s happening globally with COVID-19. Still, current events will generate technical processes in markets that could seem unexpected. In a world increasingly driven by passive investing, the strong appreciation of bonds during the crisis could trigger flows back into stocks, as passive portfolios rebalance.
Central bank liquidity and easing measures can’t create an effective response to a global pandemic, or run the machines in factories where workers have been sent home. What they can do is help create a bid under financial assets. The world’s central banks were on the case before COVID-19 emerged, and you can be sure they are watching events closely.
Gold
Gold has appreciated during the COVID-19 crisis, as we would anticipate. An allocation to gold bullion works well to smooth a portfolio’s volatility during disruptive events such as a potential pandemic. However, our case for gold in 2020 is based on some deeper trends: first, the longer-term dynamics of the current economic expansion; second, a gradually growing desire among many market participants to hedge against its eventual demise; and third, the gradual accumulation of additional gold reserves by central banks around the world seeking a buffer in the next crisis and more independence from the U.S. dollar. While our view remains that recession is unlikely in 2020, last year’s inversion of the yield curve started a clock ticking in the minds of many market participants, and that will be a tailwind for gold.
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