Why Are Stocks Climbing as Economic Conditions Deteriorate?

The performance of stock markets in the first several weeks of 2019 has been nothing short of astonishing. After a horrendous fourth quarter in 2018 that was the worst since the Great Depression, markets rebounded to have their best January in 30 years. That has some market pundits crowing about how well markets will do this year. Some even claim that if markets continue to gain in February that it’s almost certain that we’ll see double digit returns this year. But will that really happen?

It’s curious that stock markets continue to rise even as economic data continues to be highly pessimistic. More and more companies have reported poor fourth quarter sales results, with initial indications that the first quarter results this year will continue that weak streak. And with the trade conflict with China ongoing and showing no signs of abating, it’s almost comical how markets gain several hundred points just on news that there might be a teensy-weensy amount of rapprochement between the two sides. So who’s buying all these stocks?

Professional investors are net sellers of stocks this year, moving their holdings into bonds and cash as they expect the economy to worsen over the course of the year. Retail investors are similarly moving away from stocks and putting their money into bonds or cash, again with the same worries about the economy. Since every seller has to find a buyer, that means that the likeliest culprits buying stocks at these prices are companies engaged in stock buybacks.

Companies are still looking to take advantage of low interest rates to issue debt so that they can purchase their shares back. Investors who aren’t aware of that and think that markets are recovering will certainly be surprised when buybacks end and markets start to collapse.

Retail investors fleeing the stock market could be a major factor behind gold’s amazing rise in price so far this year. Gold has always acted as a safe haven asset, so it’s no surprise that investors are piling into it in preparation for a coming recession. Gold protected investor wealth during the last recession and will do the same during the next recession. Have you protected your assets with gold yet?