Reading Mixed Market Signals

August 28, 2020

The S&P 500 hit multiple record highs this week, closing at 3,484.55 for the first time ever on Thursday.1 With U.S. large-cap stocks hitting highs, you might expect other, non-related asset classes to be behaving differently. However, this has not been the case.

For example, gold, which often moves inversely with equities, logged an all-time high on Aug. 4 by crossing the $2,000/oz threshold.2 Commodities, one of the worst-performing assets of the last decade, have experienced its best four-month stretch since the second quarter of 2016.3 The 10-year Treasury also reached historically high prices with the yield falling to 0.52% on Aug. 4.4 Nationally, housing prices were 4.3% higher in June than they were in June 2019.5

While the economy remains in recession, many asset classes are trading at or near record-breaking valuations. Interestingly though, these prices are transmitting different messages. Equities are signaling optimism and a quick recovery. Gold, viewed as a safe-haven asset and store of value, is indicating market uncertainty and heightened inflation concerns. Bond prices are flashing a warning sign that weakness and a deflationary environment may be ahead.

Amid all of these mixed signals, it is increasingly difficult to develop well-founded conclusions and make substantiated investment decisions. Until we see positive fundamental improvements in measures like consumer confidence, unemployment and earnings, we need to take current market indicators with a grain of salt. It is very likely these market signals are now communicating contradictory messages primarily because of the unprecedented actions of the Federal Reserve6, and we may continue to see false signals in market prices moving forward.7

As we have mentioned previously, we believe the economy will recover from this recession as it has done in prior health emergencies and that companies will continue to evolve their businesses and grow their earnings. In the near term though there are still many unknowns and as such, it’s important we remain diversified in portfolios to be properly prepared for what comes next.

If you have any questions regarding your asset allocations, please contact your financial advisor.

1. USA Today (8/27/20) – S&P 500 pushes further into record territory as Fed plans to keep rates lower for longer; Dow also soars
2. MarketWatch (8/4/20) – Gold ends above $2,000 for the first time in history as U.S. dollar and bond yields recede
3. DFA Returns 2.0 (7/31/2020) – Bloomberg Commodity Index
4. U.S. Department of the Treasury (8/28/20) – Resource Center, Daily Treasury Rates
5. MarketWatch (8/25/20) – Home prices continued to rise in June Case-Shiller index finds
6. Reuters (7/13/20) – Federal Reserve’s $3 trillion virus rescue inflates market bubbles
7. CNN Business (6/10/20) – Fed says it will keep stimulus coming for years

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