The Global Economy: Still Ailing
I recently watched Men in Black with the kids and the movie made me think of market sentiment. Investors seem to have forgotten the coronavirus-induced crash, as if their memories have been erased by a “neuralyzer.”
From February 2020 through March 2020, the S&P 500 lost about 20%, to post the fastest bear market in history. The S&P 500’s pandemic low on March 23 marked a decline of 35% from its February record.
As we enter the dog days of August, economic fundamentals remain bleak. But amnesia reigns on Wall Street.
The S&P 500 yesterday rose 0.23%, to close at the all-time high of 3,389.78, roughly 52% above its March low. The Dow Jones Industrial Average fell 0.24% and the NASDAQ rose 0.73%.
The technology-heavy NASDAQ, propelled by a powerful surge in Big Tech stocks, already was trading at record levels and breached a new high yesterday. In pre-market futures trading Wednesday, all three indices were poised to extend their gains. The coronavirus bear market? Never happened.
Investor minds apparently have been wiped clean of the global recession, too. You’d think that the robust rally in equities is a sign that national economies are on the mend. Far from it.
The International Monetary Fund (IMF) released an updated forecast in June for the global economy that’s substantially more pessimistic than its previous forecast in April (see chart).
After expanding an estimated 2.9% in 2019, world gross domestic product (GDP) is projected to shrink by 4.9% in 2020. This forecast has been revised down from the IMF’s projections published in April, when the organization forecast a 3% contraction in 2020.
For full-year 2020, the IMF expects the U.S. economy to contract by 8.0%; the Eurozone and the United Kingdom to both contract by 10.2%; China to grow by 1.0%; Japan to plunge by 5.8%; and India to fall by 4.5%. These numbers indicate the worst downturn since the Great Depression.
In the second quarter alone, the U.S. economy shrank by 32.9% on an annualized quarter-over-quarter basis, the worst drop on record.
A question of balance…
Rather than serving as a gauge of overall prosperity, equity markets are currently reflecting wealth inequality. This widening gap is exacerbated by the pandemic. Don’t think you’re immune. These imbalances threaten everyone’s financial security.
Here’s what the IMF had to say in its June report: “The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.”
I still hear pundits on television saying a V-shaped recovery is imminent. Like Agent Smith and Agent Jones in the aforementioned movie, they want us to forget the evidence in front of us.
Not only is the global economy still reeling from the coronavirus, but rates of infection and deaths are resurgent in the U.S., making our country the weak link in the global chain. As of this writing on Wednesday morning, the U.S. has experienced nearly 172,000 deaths from COVID-19. Health experts estimate that the number will exceed 200,000 by September. It’s even harder to argue that these deaths aren’t happening.
Pandemic-induced business closures and quarantines will remain with us into the foreseeable future. America now faces the worst of both worlds: a surging coronavirus pandemic and a sputtering economy.
Silicon Valley has been reaping a windfall during the pandemic but many other industries are on life support. Small businesses are going bankrupt in droves. This disparity is unsustainable.
Roughly 70% of U.S. GDP is comprised of consumer spending. Unemployed consumers who have been evicted from their homes won’t be able to buy the products and services of tech companies, no matter how enticing their wares. A two-tier economy is inherently unstable. Despite the Federal Reserve’s heroic efforts to prop up the markets, reality will eventually intrude.
Yes, you should stay invested. And yes, the economy should recover sometime in 2021. But in the interim, your portfolio needs a hedge. That’s where gold comes in.
The mettle of the yellow metal…
Gold provides protection during crises and it’s not too late to add some to your portfolio. During the next market panic, you’ll be glad you have exposure to the yellow metal.
Gold has experienced a healthy run-up in prices over the past year. However, the rally in gold should continue during the coronavirus outbreak. I prefer owning gold mining stocks to bullion or even gold funds. I’ll explain why.
An investor who buys gold outright owns an asset that will fluctuate in value. If you buy an ounce of gold at $1,000 and the price goes up to $1,100, you’ve just captured a +10% return. Not too shabby.
But if you own gold mining stocks and the price of gold goes up, the concept of “operating leverage” kicks in. A rise in gold prices will likely exert an exponentially huge boost on a gold producer’s top line revenue. Because the producer doesn’t have to put a whole lot of additional labor or capital into digging out increasingly valuable gold, its earnings should go up and take the stock’s price with it.
A +10% increase in the price of gold should eventually lead to a more extreme price movement in the price of gold mining stocks because the gold miners have debt on their balance sheets.
Of course, the only logical reason to invest in gold stocks is if you have determined that the actual price of gold will rise. I think it will. The backdrop of political instability, worsening global recession, dismal corporate earnings, a persistent pandemic, and an overvalued market all combine to set the stage for further gold price appreciation.
For details about a well-positioned gold mining play, click here now.
John Persinos is the editorial director of Investing Daily.