The final week of July saw the US stock markets notch up their best results in more than two years – the S&P 500 rose by almost 9% in July, the Nasdaq 12% and the Dow Jones Industrial Average 6%, its biggest monthly gain since March 2021. Investors seem to be accustoming themselves to the war in Ukraine, 40-year-high inflation combined with central bank dithering, signs that economic growth is faltering, and taking comfort from a better than expected earnings’ season by big US companies. The broad market, as assessed by the Morningstar US Market Index, ended July almost 12% higher than its 52-week low on 16 June.
It seems to be a case of ‘happy days are here again!’ so fill your boots with shares.
But maybe this is a classic bear market ‘trap’? Do we think that recession/stagflation fears are over?
A bear market is one where there are prolonged price declines, generally in the order of 20%; the S&P 500 index dropped into bear market conditions towards the end of May this year. Bear market rallies can suck in the gullible and punish them mightily.
Bear markets are fairly regular – since the Second World war there have been nine declines of 20%-40%, and three of more than 40% in the S&P 500, with the last bear market being in February and March 2020, when the S&P fell 34%, only to rebound by mid-August.
What happens to gold in a bear market? Historically when stocks overall are falling, the gold price tends to move higher. It’s probably too soon to be sure which way we are headed – but all the circumstances that typically accompany a bear market seem to be in place.
Is this going to be 2008 all over again?
Few of those who were alive and aware at the time will forget the real fear that gripped the world during the Great Financial Crash of 2008. The catalysts for that were a collapse in US house prices and a concomitant rise in the numbers of mortgage holders unable to repay their loans.
Opinions are sharply divided as to whether conditions this year resemble those of 2008. Some have dubbed this as the ‘New Great Recession’; the chief investment officer of Morgan Stanley has said the “chances of a recession ticked higher last week, driven by the Federal Reserve’s latest rate hike and hawkish forward guidance” although added that the 2008 crash was fundamentally brought on by unsustainable debt rather than the problem today, which is “excess liquidity” – “extreme levels of COVID-related fiscal and monetary stimulus pumped money into households and investment markets, contributing to inflation and driving speculation in financial assets”.
Elon Musk, Tesla’s CEO, said at the start of June he had a “super bad feeling” about the economy and wanted to cut around 10% of salaried staff. Mind you, Musk evidently makes mistakes – in February last year, he said Tesla had bought $1.5 billion of Bitcoin, when the month’s closing Bitcoin price was $45,068.05, 36.5% up for the month. He said at the time that “Tesla will not be selling any Bitcoin”, only to sell 75% of Tesla’s Bitcoin holdings in July this year , when the price was close to $23,000.
According to the US Commerce Department, US gross domestic product (GDP) fell by an annualized rate of 0.9% in the second quarter of this year. That means the US is technically already in a recession as the first quarter saw GDP slump by 1.6%.
How do you feel?
Chat about bear markets is far removed from many peoples’ concerns. It’s how far money stretches that worries people at the moment – and that stretch is much less than this time last year.
The chart above shows that people living in the majority of US states feel pretty miserable, thanks to record-busting inflation of more than 9%, and above 10% in eight cities. US President Joe Biden urged Americans to ‘stay calm’ and said that his team was tackling the problem, by passing an ‘Inflation Reduction Act’, which will probably not “have any impact on inflation” according to an academic study. As the certainty grows that the slowdown will turn into a recession President Biden is running out of time to turn the economy around before November’s critical mid-term elections; according to the National Bureau of Economic Research (NBER) since 1945 the average recession has lasted about 10 months.
Misery is getting a grip on households both sides of the Atlantic. Across the 19 countries within the Eurozone inflation rose to 8.9% in July; in the UK it hit 9.4% in June. By October the UK will have a new Conservative Prime Minister, with the two candidates vying to outdo one another on unfounded promises to their party’s electorate, who will choose the winner. The European summer will soon be over and colder days are ahead. The Russo-Ukraine war drags on, with Russia’s gas supply to Europe now a useful weapon for the Kremlin. Energy bills for an average consumer in the UK could reach almost £4,000 by next January and some sources suggest that gas storage facilities across the European Union could run out entirely by March 2023 unless savings of 11% (compared with previous years) are made; 22% in Germany.
The Ukraine war has already seen some unexpected consequences. Uniper, which supplies around 60% of Germany’s natural gas, has been bailed out by the government (at a cost of €15 billion or $15.40 billion) to save it from bankruptcy – German customers of Uniper will have to pay an extra €1,000 a year for the period October-April. As David Frum has said in The Atlantic magazine, one of the “world’s largest energy producers is using its oil and gas as a weapon against its formerly best customers. World markets are disrupted as a result”.
Since 1980, the US Dollar has lost 72% of its value, the Pound Sterling 79%. This year’s record inflation rates exacerbate those declines in fiat currency values. Until the war in Ukraine ends – preferably amicably – the world can only hope for no more inflationary shocks. Central banks have not just lost control of inflation; even monetary policy may no longer be in their hands.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.