FORECASTS & TRENDS E-LETTER
By Henry Rohlfs
April 30, 2024

All That Glitters is Code

IN THIS ISSUE:

1.  A Bad Moon Rising?

2.  Gold is Acting Like a Tech Stock

3.  Simply a Diversifier

4.  A Final Thought

The Federal Open Market Committee meets this week, so we first take a quick look at the latest inflation data and guess whether the members vote for an interest rate cut anytime soon. But more interesting will be a discussion that asks if the price of gold now follows tech stocks. I think the data will surprise you.

A Bad Moon Rising?

The Personal Consumption Expenditures price index, the inflation gauge closely watched by the Federal Reserve, moved higher to 2.7% for the year as of March 31. That rate as released by the Commerce Department was higher than February’s reading of 2.5%. Core PCE, which removes food and energy prices, held steady at 2.8% but exceeded analysts' expectations of 2.6%.

On a monthly basis, prices rose 0.3%, unchanged from the pace seen in February. Inflation is definitely moving in the wrong direction for the Fed. Primary culprits for the increase are housing and general services, where price increases tend to be “sticky.”

The Federal Open Market Committee policy meeting begins today, and central bankers are widely expected to stay the course and keep rates where they are until clearer progress is made. Of great interest will be the release of the FOMC participant “dot plot” which shows members’ projections of interest rates in the future. The March 2024 dot plot was slightly more hawkish than the December 2023 dot plot, meaning the FOMC median projected year-end 2024 Fed funds rates would be higher – as much as 30 basis points higher than originally expected.

The CME Group FedWatch tool predicts a mere 11% chance of a 25-basis point rate cut at the June FOMC meeting and a 29% chance at the July meeting. Rate cut probabilities fail to reach 50-50 until November of this year.

We will keep a close eye on GDP and consumer spending, both of which rose in Q1 2024 according to Commerce Department initial estimates. The data showed that Americans spent more on services and less on goods. If spending numbers begin to slip and inflation remains sticky, the probability of recession may be the bad moon on the rise.

Gold is Acting Like a Tech Stock

Last week I ran across an interesting article by Jim Paulsen, a former Wall Street economist and strategist who shared some insightful commentary on market trends and the economy. His points of view really challenge my preconceptions on market trends and the forces that cause them. He can also be a bit irreverent, which makes his posts fun to read.

Jim asked the question, “Why is Gold Acting Like a Tech Stock?” Wait… what? That isn’t supposed to happen. Gold isn’t a growth stock. And tech companies are not in short supply, nor the first place investors think to securely park funds.

Generally speaking, gold and equities have an inverse relationship. When the gold price goes up, stock market prices tend to fall, and vice versa. Historically, it has been observed that when the stock market is most pessimistic, gold performs very well.

But since 2018 the price of gold and the relative price of technology stocks have been moving together. The chart below compares the spot price of gold with the relative price of the S&P 500 technology sector.

As the chart shows, there is a +0.94 correlation between the two. First, let’s explain correlation coefficient. Correlation values range from -1 to +1, where -1 is perfectly inverse correlated – one rises while the other falls. A correlation of +1 means the two are perfectly correlated, marching along together in lockstep.

Simply a Diversifier

I’m sure the gold bugs are saying, “But that isn’t true in the long run!” That’s correct. If you look over many decades, gold has a tendency to negatively correlate to the stock market as a whole. During periods of economic stress, gold generally tends to decouple from stock market prices and hold its value. When global markets decline, stocks and currencies often move downward, and investors turn to gold as a safe haven.

Interestingly, gold’s 12-month correlation with the S&P 500 over the past 45 years averages zero. This means that, on average, gold doesn’t consistently move in the opposite direction of the stock market. As an example, since 2005 the SPDR Gold Shares ETF (GLD) has had a correlation of +0.14 with the S&P 500.

Maybe it’s already too late, but I’ll stop here with the statistics before we get too far into the weeds. If you’re into technical market analysis, Paulsen shows how gold and tech stocks have moved somewhat together over the last 50 years. Of course, there are periods when the opposite held true.

The big question is why this correlation is true. Paulsen admits he doesn’t know, and I certainly don’t pretend to know either.

One distinct possibility is that investors are now using gold as a diversifier in a bull market, perhaps to help stabilize “Magnificent 7” stock return volatility. With the constant drone of gold ads in the media, it seems the market to purchase gold exists, even with higher markets. If that’s true, perhaps the bull market is not yet over.

A Final Thought

We have particularly enjoyed wildflower season in the Texas Hill Country this year. Sufficient rains and a relatively mild winter have provided the conditions for a brilliant show. The violet colors of bluebonnets, the State flower, pop up first, followed by the reds, yellows and oranges of Indian paintbrush, coreopsis, firewheels and Blackeyed Susans. Soon the show will be over with only brown grass left in 100-degree heat.

I can’t help but think the economic spring is waning and we are headed to the dog days of market summer. Grab a sweet tea or lemonade and appreciate the moment.

All the best,

 

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