The S&P 500 continued its march higher into bubble territory, rising 2.17% last week. Volume continued to shrink, meaning that this is a rising market that fewer and fewer ‘investors’ believe in or wish to participate in. Volatility dropped back down to the complacent levels seen in January and February, but not lower simply because VIX has historically never gone much lower.
Meanwhile, the US economy continues to muddle through. Although ISM services rose slightly more than predicted, factory orders contracted. International trade was worse than predicted, and this will have a direct—negative—impact on GDP growth. Initial jobless claims were slightly better than expected, but productivity and labor costs were not (ie. corporations are seeing unit labor costs surge and this will hurt future profitability). The big number of the week was the payrolls report, and it beat expectations by rising almost 240,000. And unemployment fell to 7.7%. But under the surface, the reality was much more ugly. The labor force participation rate fell; this means that while the headline unemployment rate looks better, than more and more discouraged unemployed people are simply giving up and leaving the workforce. Most importantly, the strong headlines ignored the quality of the jobs created. The reality is that about 500,000 part-time jobs were added in February, BUT at the same time about 250,000 full-time jobs were lost. The result is a net addition of about 250,000 jobs, but they were essentially all part-time jobs! Not good.
Technically, the S&P is, once again, extremely over-bought and overly bullish. As mentioned earlier, the US stock market is in a condition that resembles its condition in 1929, 1987, and 2007 (according to economist and money manager John Hussman). Does this mean that a crash is around the corner? Of course not, but it does mean that the US stock market is extremely vulnerable to a severe correction.
What about gold?
It’s fallen about 18% from peak prices reached in mid-2011. The good news is that it’s still in a bull market, 12 years after it began. And the most critical driver of rising gold prices—negative real interest rates engineered by the Fed—is still in place today and in the foreseeable future.
The bad news is that gold is vulnerable to more declines in the short to medium term. If the US equity markets do take a tumble, and if gold behaves in a way that echoes its movement in 2008 when US equities last suffered from a bad tumble, then gold could take another notable drop before resuming its long-term uptrend.
Well, gold fell about 35% in 2008, without breaking its uptrend. If the same 35% were applied to the most recent peak price (about $1920), then gold could fall to the mid-1200’s.
But again, even if gold were to fall into the $1,200’s remember that this would still NOT break its 12 year bull market!
What to do if it falls anywhere near these levels? Simple, buy it.
The Fed will not walk away from risk asset markets and the financial system. And the ONLY tool it has left to deploy is to push real interest rates even further into negative territory by printing more money. And this will inevitably be bullish for gold, in the long-term.