Three data items to discuss with you today:
#1: The latest readings from the New York Federal Reserve’s Weekly Economic Index show US economic growth has largely ground to a halt over the last 2 months. This is a high frequency index the NY Fed put together right after the pandemic hit last year with the help of some outside data sources. It includes inputs like individual tax withholding data, retail sales, electricity output and initial unemployment insurance claims.
The chart below shows that, for the first time since the US economic recovery started last April, the current reading (-2.3% GDP growth) is right on top of the 13-week average. Also, the week of January 22nd level is not much better than the week of November 28th, 2020 and actually worse than the week of December 26th, 2020.
Takeaway: the US economy appears to be at stall speed and needs some combination of faster vaccine rollouts, more fiscal stimulus, and selected/safe reopenings of businesses to resume its climb. Chair Powell said as much in yesterday’s press conference and we suspect he had this chart in mind when making his observations.
#2: There are many different measurements of “cash on the sidelines” (liquid capital that investors can quickly allocate to stocks), but we favor money market fund (MMF) balances as the most accurate/intuitive metric.
This chart shows both retail (small investor) and institutional (high net worth, pension & endowment, corporate, etc.) money market fund balances from 2005 to the present. The general contours through the Financial Crisis and more recently the pandemic show what you’d expect to see. MMF balances stay low during economic expansions, rise as recession concerns grow, peak a few months after the lows for stocks, and then gradually decline again.
Four brief points on what this chart means for the current investment environment:
- How much cash there might be on the sidelines depends on when you think capital started sitting out of the game in the first place. “Trough cash” over the last decade was in 2014 – 2015. Today’s aggregate cash levels are $1.6 trillion higher than that.
- If you take January 2020 as the starting point (pre-US election, pre-Pandemic), then the sideline money totals are smaller: $638 bn in total, made up of $93 bn in retail MMF balances and $545 bn in institutional balances.
- It takes years for “sideline money” to get back on the field. In the early 2000’s it took 3-4 years to go from peak to trough retail/institutional fund balances. After the Financial Crisis, it was 3 years.
- The data shows that the “cash on the sidelines” indicator was more correlation than causation in 2020. Cash levels actually peaked in mid-May 2020 even though equity markets had bottomed 2 months before.
Takeaway: cash coming off the proverbial sidelines is not really what makes a bottom, but it is some of the fuel that sees markets through post-crisis gyrations and to higher highs in the years after the bottom. The fact that MMF balances are already starting to decline (visible on the extreme right of the chart above) shows this process is already underway.
#3: The World Gold Council is just out with its 2020 market recap, and it provides a useful framework for thinking about marginal demand in 2021 and beyond. Four brief points on this:
- Global gold supply was down 4 percent in 2020, driven by pandemic-related supply disruptions. Recycling, which was 28 percent of total production (1,297 troy tons vs. 4,633 tons), was up 1 percent.
- Q4 2020 gold demand was down 28 percent, the worst year-over-year comp since the Financial Crisis’ Q2 2008. For the year, demand dropped by 14 percent to 3,760 tons, which the WGC notes is “the first sub-4,000 ton year since 2009”.
- Global gold jewelry demand, the largest end market for the metal, was down 34 percent last year. Q4 2020’s comp was better, down just 13 percent.
- The offsetting positive was investment demand for gold. Bar and coin demand grew 10 percent in Q4 and 3 percent for the year as a whole. Demand from gold-backed funds like ETFs grew 120 percent last year although Q4 saw small net outflows as we recently discussed with you.
Takeaway: the price of gold is down 11 percent from its August 2020 peaks, driven by a combination of still-slack global jewelry demand and financial (fund) buyers pushing hold on their rush into the asset. Those are the levers when considering where gold goes in 2021. The easiest/most logical case to make is that jewelry demand will recover and fund buying will continue, but not at 2020’s high levels. Inflation remains, as we have been chronicling this week, a front-burner issue for many investors. As we see CPI/PCE data roll out over 2021, investment demand for gold should continue to be firm. The bottom line is that we still like gold here for a 3-5 percent position as a hedge against near term inflation.
World Gold Council report: https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-full-year-2020