US earnings exceed expectations, gold continues to standout
With US quarterly reporting season nearly wrapped up, the trend is showing that earnings were better than the lowered expectations this quarter. Considering the long list of headwinds such as high inflation, rising interest rates, supply chain disruptions, Covid-19, lockdowns, war in Ukraine and geopolitical concerns, the market had prepared itself for a quarter of poor extremely earnings. Broker earnings forecasts were factoring in the full brunt of Covid-19 and its lockdowns to hit corporate profits this quarter. But earnings weren’t hit as hard as expected despite rising interest rates and higher inflation eroding cash flows.
These macro headwinds did change the investment status quo and forced investors to change strategies. With bonds and equities falling at the same time, the typical 60/40 stock and bond portfolio naturally struggled.
Rising inflation triggered a global rotation out of risky assets and into safer ones. And some of the riskiest assets going around, was cryptocurrencies. Once touted as ‘safe haven’ assets, the crypto crash crypto sent Bitcoin and Ethereum prices down as much as 60-75 percent.
As US stocks plunged this year, there were few places of refuge where investors could hide and avoid the carnage. The group that stood out was oil/energy, which topped the S&P year-to-date performance fuelled by soaring oil prices caused by Russian sanctions. Utilities also fared well, generally considered to offer a way to hedge inflation risk.
The third asset class was gold. Unlike crypto, Bitcoin and Ethereum, Gold has maintained its safe-heaven status and held its value while almost every asset tumbled. Rush Gold Director Mark Pey said, “As investors flee bonds as prices decline and interest rates rise, investors will need to rotate into another capital preservation asset. The bond market declines in H1 2022 were a clear rejection of bonds as the long-time traditional safe haven that has been enjoyed since the last decline of this magnitude in 1865.”
Given the size of the bond market globally (+/- $140T), key characteristics investors will seek are daily liquidity and an asset that is similarly traded globally. The gold market is currently sitting at $12T and could see a significant price increase as investors rotate out of bonds and into gold.”
With some countries forecasting inflation to hit 20 percent as they did back in the 70s, “Europe has been especially vulnerable given its economic weakness and now some countries are seeing inflation rates touch that 20% seen back in the 1970s. In particular, Estonia and Lithuania with Turkey way ahead with an exceptionally high inflation rate of 78.62%,” says Pey.
Pey finishes off by saying “that if investors take into consideration the historical parallels both locally
and globally, the current gold price weakness could provide a solid entry point into a strategy looking for diversification.”