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Are the roaring twenties back?

Are the roaring twenties back?

Dr. Ed aka Ed Yardeni from Yardeni research, a well-known US strategist, reckons in his latest blog, that due to the stimulus and the disruptive new technologies (i.e. AI; robotics 5G, etc.). we could see a similar technical innovation and equity market development like in the roaring 1920-ies. There we have seen as well fast changes in industrial developments and a rising stock market. We all know how this ended. The straw that breaks the camel’s back this time could be the Fed rising its policy rate above 3-4%. However, this is still far away, i.e. the earliest start of rising rates is according to the Fed at the beginning of 2023.

Goldman Sachs who was very cautious about the US equity market for the rest of the year has just increased its S&P 500 year-end target to 3’600 points and its 12-month price target stands now at 3’800 points.

Having been positive for quite a while I like to add ¨that we agree with the mid-term forecast. I do not know what exact level we see at the end of the year, but I would go for higher than now. Having said that short-term markets went up very fast and its distance to the 200-day average is still very high (please see Fig 4 & 5).

Fig. 1: Goldman Sachs new S&P 500 price targets: 3’600 at the end of 2020

Although the US earnings seasons was one of the biggest earnings surprising quarters in history, valuation have risen to a two-decade high.

Fig. 2: Equity analysts were by far too negative regarding Q2 earnings

Fig. 3: S&P 500 valuation has reached a two-decade high measured by forward PEs

Fig. 4: S&P 500 is well above its 200-day average – a pullback would be healthy

However, from a technical point one could as well argue that the green line (100-day average) might cut the yellow line (200-day average) which from this pure technical angle is very bullish for the market.

Fig 5: Similar technical picture in the Gold bullion price development

However different to the US equity market we have seen a 10% correction in the gold price and a similar move in mining stocks. As we speak the gold ounces price has regained the USD 2’000 level within two trading days.

Fig 6: Gold mining stocks dropped more than 10% but are still up more than 45%

We would argue along the same lines as we did for US equities. We are in a secular gold bull market and might soon reach 2’500 or even 3’000 levels like most gold strategists expect. Nevertheless, the distance to the 200-day average is very big and therefore a 2nd pullback can happen any time soon.

For both markets negative US real yields, fiscal and monetary stimulus will most likely dampen any correction and support the positive mid-term outlook for gold and US equities.

However, this under the assumption that US inflation will only pick up moderately above 2% to 3% and the Fed is able to control the treasury yield curve. So far both seems to be the case.

Fig. 7: US Treasury yield curve

The actual US yield curve is steep and depressed at the same time. The 10-year yield stands at around 0.65% and the 30-year at 1.4%, while the US CPI (ex food and energy) stands at 1.6%.

Therefore, if you were to buy a 30-year US treasury bond you would get a negative real yield of around 0.2%. Not really a compelling investment. However, this might be exactly what the Fed is trying to achieve. If inflation were to rise to about 3% and the yield curve would not move due to Fed intervention the negative real yield gets even larger, aka financial repression. The only way to protect wealth in such a situation is to buy real assets, like gold or real estate. But also, to invest into corporate America. If the inflation is contained, and the Fed is not rising its rates above 3% this market might just continue to be climbing the wall of worry.

Fig. 8: US Inflation expectations are rising

Fig. 9: The US yield curve indicates an economic recovery

Teh10-year 3-month and 10-year 2-year US yield spreads continue to rise. We cosnider this as an indication that the actual recession might soon end and we see an acceleration of US GDP ahead of us. Like the equity anaysts macro forcasters are very cautious and we might therefore see positive surprises once the Q3 GDP estimates will be published. The Q2 figures so far have beaten the negative forecasts, but also confirm a sharp contraction. But do not foget, equity markets do price in the future. So far the market seems to disagree whith these bearish forecasts.

There is a high probability that Dr. Ed and Goldman Sachs might be right about the future path for US equity prices. We would however, not chase the market at current elevated levels as we still consider a pullback to be a key short-term risk. But as long as stimulus factors stay in place, infaltion and the US government bond markets stay in expected ranges the path for both gold and equities will most likely go further up over the coming months.

Published: 18/08/20 by Blackfort CIO Dr. Andreas Bickel


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