Better safe than smart?

Stocks rose in all the markets that we follow, with the MSCI World Index returning a nice 2.1% in local currency. Bonds had a good run, too; both the Bloomberg Global Aggregate (investment grade) and the Bloomberg Global High Yield were up by 1.5%. European investors didn’t fare that well, as the US dollar fell by 2-3% against their currencies. Nevertheless, their stock markets rose as well – including Norway, despite lower energy prices.

There was little in major headlines to indicate such a rosy August. Trump fired Bureau of Labor Statistics Commissioner Erika McEntarfer and said he’d fire Federal Reserve governor Lisa Cook. Ukraine peace talks went nowhere. US tariffs on Indian goods were hiked to 50%, which of course won’t last but still rattled the Indian stock market. Eurozone inflation climbed back above target. And gold, often claimed to be a safe haven for concerned investors, hit another all-time high.

I have been loud and clear in not advising our clients to buy gold. It’s up by 36% over the past year, so my timing has not been the very best. Luckily, stocks are up too, reducing the opportunity cost. And would you really attach the word “safe” to something that rises 36% in but a year?

But I digress. Here is where it gets interesting: While stocks and gold exhibit positive co-movement, in the sense that both have risen strongly over the past year, their 12-month correlation is surprisingly and distinctly negative – it’s -0.74 based on monthly observations. It hasn’t been lower since 1978, when US inflation was getting ready to hit two decimals.

So, both have been rising – just not in tune, in fact very much not in tune. Bad months for stocks have been good months for gold, and vice versa. And yet they both end up notably higher. What’s happening?

Here’s one possible explanation: Maybe gold really caught on to the public apprehension, while inelastic demand for stocks kept pushing stock prices higher. You may be familiar with the concept of inelastic demand if you follow my optimal Pareto blog. Or maybe those headlines have more relevance for gold prices than for stocks.

Just think about it. What would propel investors to look for a safe haven? Right – uncertainty and apprehension. There are fears they want to be safe from.

In contrast, what would lead investors to buy stocks? I truly hope the answer is something along the lines of long-term returns due to company earnings strength. That, at least, is what we tell our clients.

With stocks, you don’t hide from nasty headlines. You ride it out. Keep that in mind if contemporary events make you wish you had indeed found a safe haven – and look instead for a smart haven.

Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.