Market Overview – 13/08/2020

Stock markets enjoyed another strong week, despite the US failing to agree a rollover of the aid package for millions currently out of work. It was also notable as a week when the US Nasdaq Index closed above 11,000 for the first time ever and gold closed above $2,000 per ounce, a new all-time high. How is it that an index full of high performance technology companies (very risk on) can reach new levels at the same time as an asset that is seen as a safe haven in times of crisis (very risk off)? Both are up by over 20% since the start of the year.

There is a technical reason to support this and some practical ones as well. Bond yields are close to zero in the US and negative out to longer maturities in a number of other countries, Gold earns no interest, so the opportunity cost of holding gold in terms of lost income is now very low. Therefore one of the traditional reasons for not owning it i.e. it earns no income, ceases to have the same resonance.

Meanwhile, technology stocks are often characterised as long-term growth stocks, or long-duration assets. Lower bond yields mean a lower discount rate, which increases the present value of the long-term earnings stream. This in turn makes the stocks more attractive, pushing up share prices. Lower bond yields can therefore help both gold and technology stocks.

A more practical reason for the Nasdaq performing well is that many of the underlying companies have benefited from people being at home (greater use of mobile phones, tablets, software, streamed entertainment etc) so their sales and profits are increasing faster than before. While some may say this is a temporary phenomenon, it seems likely that, for the foreseeable future, more people will continue to work from home.

A more practical reason for the gold price to rise rests around worries that the combination of huge monetary stimulus from central banks and enormous fiscal spending by governments could eventually lead to higher inflation. In these circumstances, gold is traditionally seen as a store of value and would become more attractive to own. Theory and practice working hand in hand!