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The U.S. equity markets kicked off 2024 on a bullish notewith the best first quarter performance since 2019.1 However, it’s been a bit of a rollercoaster since then, with markets retreating a bit in late March and early April. In light of these market dynamics, we believe the following topics are important and timely:
1. What are Sapient’s thoughts about the upcoming election and its potential impact on capital markets?
In an election year, political fervor often dominates headlines, with discussions swirling around the economy and future trajectory of markets depending upon which party wins. Surprisingly, historical data suggests that election outcomes have wielded less influence over capital markets than commonly perceived. Regardless of whether the White House is held by a Republican or a Democrat, the performance of the U.S. stock market tends to be more alike than different. In the 24 election years since the S&P 500index was created, 20 of those (83%) have posted positive returns; additionally,when a Democrat has held office and wins re-election returns have average 15.0%,compared to 12.9% when a Republican takes over the office from a Democrat.2
The chart below illustrates the subsequent10-year performance of the stock market following a U.S. Presidential election.3 As long-term investors, we remain optimistic about our nation's future and its inherent ingenuity. For this reason, we have no plans to adjust portfolio stock exposure based solely on the election.
2. What is Stagflation and why is it making more news headlines these days?
The term "stagflation" emerged prominently during the 1970s, a decade marked by sluggish economic (GDP) growth, intertwined with high unemployment rates and soaring inflation.4 This collision of stagnation and inflation led to the term "stag(nation)-(in)flation." Correspondingly, this era also witnessed relatively lackluster U.S. stock market returns, as shown above (note the 10-year returns starting in 1968 & 1972).
Out of this economically-challenging period arose a measurement tool called the “Misery Index,” which combines the rate of unemployment with the rate of inflation.5 The index's value indicates the degree of economic misery, reflecting the notion that high inflation levels are more manageable when accompanied by robust economic expansion, and vice versa.
As illustrated above, the level of inflation since mid-2021 is the highest we’ve seen since that period in the 1970s, and it was only a relatively (and surprisingly) low level of unemployment that has kept the Misery Index from spiking to extreme levels again.6 Recent economic reports are showing signs of stress in the labor and unemployment data, but also potential relief in inflation.7 It will be interesting to see if the two can continue to balance out one another enough to keep the Misery Index from spiking higher later this year.
3. Why has Gold been one of the best-performing asset classes in 2024?
Gold started 2024 priced at $2,067 per ounce, it climbed 16% to a new all-time high of $2,401 on April 12th, and has since settled down around $2,350.8 Gold’s rally this year has caused head-scratching for gold market analysts for a few reasons9 – (1) the strong U.S. Dollar and stock market returns in the first quarter, as “safehaven” assets like gold often lag in these environments10; (2) interest rates and bond yields higher than we’ve seen in 15+ years, since gold generates no cash flows and essentially a 0% pay out rate; (3) the consistent selling of gold exchange traded funds (ETFs) by investors since 2022, as shown below.11
However, the demand for physical gold bars has been strong, and global central banks have also been buying gold – particularly China’s central bank – which has offset the ETF selling.12 We still believe there is a place for gold in client portfolios, as it acts as a stabilizing ballast when equity markets become distressed.
Thank you for allowing us to serve you and steward your investment capital with great care.
Sources:
1. Morningstar, April 1, 2024, https://www.morningstar.com/markets/13-charts-q1-stock-rally-that-just-wouldnt-quit
2. First Trust, June 2023, https://www.ftportfolios.com/Commentary/Insights/2023/7/5/election-client-resource-kit---june-2023
3. Capital Group, January 2024, https://www.capitalgroup.com/advisor/insights/articles/5-keys-investing.html
4. Investopedia, April 3, 2024, https://www.investopedia.com/articles/economics/08/1970-stagflation.asp#:~:text=Stagflation%20in%20the%201970s%20was%20a%20period%20that%20saw%20both,U.S.%20Bureau%20of%20Labor%20Statistics.
5. Investopedia: Misery Index, January 26, 2023, https://www.investopedia.com/terms/m/miseryindex.asp
6. Wikipedia: Misery Index, https://en.wikipedia.org/wiki/Misery_index_%28economics%29#/media/File:Misery_Index.webp
7. Wall Street Journal, May 13, 2024, https://www.wsj.com/finance/investing/investors-crowd-into-soft-landing-trade-ahead-of-crucial-inflation-data-b7cf5049
8. World Gold Council – Gold Reference Prices, May14, 2024, https://www.gold.org/goldhub/data/gold-prices
9. Bloomberg, April 7, 2024, https://www.bloomberg.com/news/articles/2024-04-07/the-gold-market-hunts-for-answers-behind-bullion-s-sudden-surge?cmpid=BBD041024_MKT&utm_medium=email&utm_source=newsletter&utm_term=240410&utm_campaign=markets&sref=NWdT70GV
10. Investopedia,August 9, 2023, https://www.investopedia.com/articles/investing/071414/when-and-why-do-gold-prices-plummet.asp
11. FinancialTimes, March 11, 2024, https://www.ft.com/content/96b621f7-90d6-457e-898a-1c04e2902ceb
12. Bloomberg,May 7, 2024, https://www.bloomberg.com/news/articles/2024-05-07/china-s-gold-buying-spree-extends-to-18th-straight-month?sref=NWdT70GV
Although the statements of fact and data in this report have been obtained from, and are based upon,sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitutes the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. Indexes, such as the S&P 500 Index, are not directly investable.
