Ride Out Volatility, With Bonds and Gold
I’ve been covering the news as a professional journalist since Ronald Reagan’s first term and I’ve never in my adult working life witnessed a wilder, more anxious year than 2020. It’s like getting strapped into a roller coaster and you’re not allowed to get off.
However, even in this topsy-turvy environment, you can still protect your portfolio and make money. As I explain below, the answer lies in two asset classes: bonds and gold.
Stocks jumped Monday, on hopes that President Trump was recovering from coronavirus and talks would succeed on a new stimulus bill. The Dow Jones Industrial Average rose 465.83 points (+1.68%), the S&P 500 climbed 60.19 points (+1.80), and the tech-laden NASDAQ rose 257.47 points (+2.32%). In pre-market futures trading Tuesday morning, all three indices were trading in the red as investors digested the news about Trump’s dramatic return to the White House from Walter Reed.
I think investor hopes that Trump has fully recovered and stimulus is imminent are unsupported by the facts. Meanwhile, we’re witnessing the messy birth of a new economy, with the global plague as midwife.
The pandemic is accelerating macroeconomic trends that were already underway. Case in point: the collapse in demand for fossil fuels, albeit recently abated, has expedited the green energy revolution.
A watershed occurred briefly during intraday trading Monday when solar and wind company NextEra Energy (NYSE: NEE) dethroned Exxon Mobil (NYSE: XOM) as the most valuable U.S-based publicly traded energy company. As of market close yesterday, NEE’s market capitalization had settled to $140.9 billion and Exxon Mobil’s to $142.6 billion. Back in August, the Dow removed Exxon Mobil from its 30-stock index to replace it with cloud solutions provider Salesforce (NYSE: CRM).
The old order is dying and the transition is painful. An economic renaissance awaits, next year and beyond. But in the meantime, with a hugely significant presidential election looming in November, you need to batten down the hatches.
Bonds serve as ballast…
The strength of the stock rally since the pandemic-era lows of late March is largely due to aggressive monetary and fiscal stimulus in the U.S. and other developed economies.
The U.S. federal government so far has generated about $4 trillion in new spending to bolster the economy during the worst economic downturn since the Great Depression.
Government stimulus checks for individuals and loans to businesses at the onset of the pandemic helped the economy withstand the worst of the downturn, with growth modestly recovering in the third quarter. But that assistance has largely expired, job market momentum has slowed, and businesses are going bankrupt.
Republicans and Democrats are deeply divided concerning the extent of new fiscal stimulus that’s warranted. If a compromise can be hammered out, the economic recovery can get back on its feet. But that’s a big question mark, as ideology-driven lawmakers squabble and the White House becomes a petri dish for coronavirus.
Throughout this uncertainty, bond markets have served as a ballast. During the bear market trough in March, the Federal Reserve launched several unprecedented steps to stabilize credit markets. The Fed currently has a whopping $7.1 trillion on its balance sheet (see chart, updated as of last Wednesday):
By slashing rates to near zero and buying government and corporate bonds, the U.S. central bank facilitated low-cost funding for households and companies.
Accordingly, bonds have rallied from their March lows. Because of the Fed’s decisive actions, bond-market functioning has returned to pre-pandemic levels and provided a pillar of strength for the economy. Access to cheap money is buttressing companies that are suffering declining demand and lower earnings.
Bonds have resumed their status as a hedge and they deserve a place in your portfolio. Despite yields at lower levels, bonds can cushion your portfolio against volatility and sharp falls in equities.
As a general rule of thumb, current market conditions suggest that you put about 10% of your portfolio allocation into bonds.
About 5% – 10% of your portfolio should be in precious metals, such as gold. These percentages depend on your risk tolerance and stage of life; you should tweak suggested allocations to your particular circumstances.
Gold makes sense as an investment not just as a crisis hedge but as a growth opportunity. From January 31 to October 5, the price of gold has risen from about $1,582 per ounce to about $1,918/oz, for price appreciation of more than 21%. My colleague Dr. Stephen Leeb, a world-renowned expert in commodity investments, has crunched the numbers and his calculations suggest a 10-year price target for gold of about $18,000/oz (yep, that’s $18,000 and not a typo).
I recommend gold mining stocks versus physical bullion or funds. To be sure, gold mining stocks entail more risk than bullion or exchange-traded funds, because these individual companies often grapple with unstable political environments overseas. However, when there are profits, they tend to be very big.
To find out exactly why our investment team is bullish on gold over the long term, click here for our special report. Our presentation pinpoints an under-the-radar small-cap gold miner that’s on the cusp of explosive gains.