In May we asked “Will Fear or Greed Prevail During the Trump Administration?” It seems that since the spring, both fear and greed are riding high. Risk-on assets (stocks) and risk-off assets (gold & silver) have done quite well with the stock market and gold both logging healthy gains. The biggest loser has been the U.S. Dollar. The Dollar Index* has shed more than 10% since the beginning of the year.
The first seven months of the Donald Trump Presidency have provided a fair amount of drama. Trump faced election recounts in three states, battled Congress to get his cabinet approved, accused former President Obama of spying on him, faced an investigation into the role of Russia in the 2016 presidential campaign that included the appointment of a special prosecutor after Trump fired FBI director James Comey, sent missiles into Syria, threatened North Korea with fire and fury, blamed “both sides” for the disturbance in Charlottesville involving Antifa and white nationalists and ordered a surge in Afghanistan.
All the while, the President continued his incessant tweeting, many of which have been aimed at the “fake news” media. Such tweeting has kept Mr. Trump’s mercurial personality at the center of attention. For historians, each chapter in the presidency of Donald Trump will contain plenty of contemporaneous editorializing in the form of the President’s tweets on events as they unfolded, or in some instances were initiated by the President himself.
Against the foregoing catalogue of events, Trump has used twitter to battle Democrats and Republicans alike while always retaining enough energy to turn some fire on the media. While some may find the President’s tweets amusing, (recall the President’s tweet of a mocked-up video showing him taking down rival “CNN”) his opponents have not been amused and view such tweeting as unhinged and even worthy of impeachment.
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All the while, the stock market has shrugged off the real and imaginary drama surrounding Donald Trump’s presidency.
Fear AND Greed?
Greed
One main reason for the initial run up in the stock market for the first few months of Trump’s presidency was the narrative that Trump would push through tax reform and infrastructure spending, including a wall along the U.S. southern border with Mexico. While neither have materialized, the stock market has continued to rise, with the Dow Jones Industrial Average soaring to over 22,000 in mid-August. The Dow opened 2017 at around 19,880.
Fear
Gold, often a barometer of the fear in markets, has clocked in a more than double digit percentage point performance. The price of gold has risen from about $1150 an ounce at the beginning of the year to over $1310 an ounce in late August, a gain of about 14%. While the price of gold has a cumulative gain, it has not been a steady trajectory. Gold has risen and fallen more than $50 during 2017 in just a couple of weeks or less.
Gold and the dollar have moved in opposite directions in 2017.
The Delicate Balance of Fear and Greed
Fear and greed often exist in a healthy equilibrium that prevents either risk-on or risk-off assets from gaining the upper hand. In 2017, the stock market has risen pretty much in a straight line with no major sustained dip in the value of the Dow Jones Industrial Average. In contrast, the price of gold has risen, even more than the Dow, but not in a straight line.
Over the past fifty years, there have been periods where the Dow and gold have risen in tandem. During these periods, one or the other eventually gained the upper hand and continued higher, while the other headed lower. For example, in 2007-08 after a few years of sustained rises of both the Dow and the price of gold, the Dow fell and gold roared higher. From 2009 to mid-2011, the Dow and the price of gold rose. Then in 2011 the price of gold fell and the Dow continued to rise. Since the end of 2015, the Dow and gold have been rising together.
The issue facing investors is whether fear or greed will prevail in 2017, or whether they will continue to peacefully co-exist.
Cognac, a Risk-On Indicator
Sales of luxury goods generally increase during periods when risk-on investing predominates. Over the past three years as the stock market has risen, so have sales of cognac. The world’s leading cognac producer, Hennessy noted earlier in this year that as a result of increased sales volumes of 15-20% over the past three years (a period of risk-on investing), there may be issues of availability later this year given consistently strong demand of its products, especially Hennessy V.S. cognac. Shortages and rationing of Hennessy cognac are starting to be reported across the country.
Will the diminishing stocks of cognac be enough to satisfy demand the rest of the year? Or are they destined to run out around the same time when the risk-on stock market appetite that has fueled a nine year bull market in stocks also becomes sated?
* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.
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This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.
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