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As the stock market hits record highs, gold prices continue to fall. A review of gold prices throughout history show that this trend will probably continue. Was commodities trader George Soros right when he said “Gold is the ultimate bubble”? Were high prices in 2011 just a sign of an asset bubble? If so, how far will prices fall?

Since President Nixon took America off the gold standard in 1973, investors have bought gold for three reasons:

1. To hedge against inflation.
2. As a safe haven against economic uncertainty.
3. To hedge against stock market declines.

In 2011, gold reached an all-time high of $1,895 an ounce as investors became concerned that Congress would not raise the debt ceiling, and the U.S. would default on its debt. In fact, gold was in a bull market since 2000, as investors reacted to the Y2K crisis (1999), the bursting of the stock market tech bubble (2000), 9/11 (2001), the dollar decline (2002-2006), the 2008 financial crisis, and the uncertainty surrounding Obamacare in the midst of a slow-growing recovery.

However, much of this uncertainty has been removed, as economic growth has stabilized around 2-2.5%, the stock market hits new record highs, and Washington seems to be in a state of gridlock. History before 2000 shows us that, as the stock market rises, gold prices fall. There hasn’t been a threat of inflation above 4% since 1990. In other words, investors have no compelling reason to buy gold.

What It Means to You

From 1979 – 2004 gold prices rarely rose above $500 an ounce. The rise to recent record-highs was a result of the worst recession since the great depression, and its after-effects. Now that things have stabilized, it wouldn’t surprise me in the least if gold returns to that historical level, or at least below $1,000 an ounce. I’m an economic analyst, not a financial planner. However, most of them advise that gold be 10% or less of a well-diversified portfolio. If you’re holding more than that now, I’d suggest you talk to your financial advisor before gold drops further. For more on what the research shows, see Why Invest in Gold.

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Fortunately, the Bureau of Economic Analysis barely revised its estimate of the GDP growth rate for Q1 2013. The economy grew 2.4%, instead of the Advance Estimate of 2.5%, from January through March this year. This is still an ideal growth rate, which is anywhere between two to three percent.

Many experts would like the economy to grow much faster than 3%, so that more jobs will be created and lower the 7.5% unemployment rate. However, faster growth runs the risk of generating inflation. Slower growth, of course, is even more dangerous at this phase in the business cycle. It could reduce confidence in future growth, and even send the nation back into recession.

The best news is that now the three major pistons of the economic engine are contributing. First and foremost, housing construction is solidly expanding in response to rising housing prices and demand. This is something we haven’t seen in seven years. Second, consumer spending is still showing confidence. Third is manufacturing, especially from agri-business that added inventory. These three private sector engines overcame the drag from decreased government spending. (Source: BEA, GDP Second Estimate, May 30, 2013)

What It Means to You

There’s a reason the stock market is reaching new highs day-after-day. It’s not solely because of Quantitative Easing (although that certainly helps) or debt reduction. It’s because the economy is finally functioning in a healthy fashion. Homeowners feel like their #1 investment is increasing in value. This fuels demand and consumer spending. Manufacturers can confidently ramp up again. The final effect is that they will keep hiring, which I expect we’ll see in the Employment Report next Friday. It’s the upward spiral of the expansion phase, instead of the downward one of contracction that began in 2008.

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Across the board, U.S. prices fell .4% in April, as measured by the Consumer Price Index. An 8.1% drop in gas prices offset mild price increases in most other goods and services. Used cars and trucks were up .6%, while new vehicle prices rose .3% as did the cost of going out to eat. Grocery prices only rose .1%, as did medical supplies. Health care services actually dropped .1% last month.

Since gas prices usually drop this time each year, it’s important to look at price changes year-over-year to remove the effect these seasonal variations. Here again, inflation was mild, with prices rising just 1.1%. That’s because gas prices were 8.3% lower than this time last year. This offset a 2-3% increase in prices for just about every other category.

Another important inflation indicator is the core inflation rate. That’s the indicator the Federal Reserve looks at to determine whether it needs to raise or lower interest rates. If the core rate is higher than the Fed’s 2% target, the Fed will end its current Quantitative Easing program, probably ending the stock market’s current bull run.

Here again, inflation is mild — the core inflation rate is only 1.7%. That’s good news for both Wall Street and Main Street, because it means low interest rates will continue. (Source: Bureau of Labor Statistics, Consumer Price Index, May 16, 2013)

What It Means to You

Mild inflation is good news for you and the economy. Lower gas prices gives you more to spend on other things, which helps boost economic growth. In the long run, lower oil and gas prices translate into lower transportation costs, helping lower the cost of food.

Gas prices usually rise each winter, and fall each spring. Take advantage of low prices now, but don’t expect it to last. Sure enough, prices will peak again. Since it’s been happening earlier and earlier each year, perhaps gas prices will start rising again as early as December this year! To find out why, see How Crude Oil Prices Affect Gas Prices.

When compared to historical U.S. inflation rates, the current mild inflation seems a welcome respite from wild price swings. The last time inflation was higher than 5% was in 1990, right before a recession. Inflation has not reached the double-digits since 1980, when the economy was plagued with stagflation. To combat the 12.5% inflation rate, the Federal Reserve bumped interest rates to 18.9%, which sent the unemployment rate skyrocketing to 10.8%.

If you look back even further, inflation was 18.1% in 1946, as the U.S. mobilized to fight World War II creating shortages of most everyday items. This was the antidote to the Great Depression, where prices dropped 10.3% in 1932. This kind of deflation might sound great, but it was only because demand was so low that businesses had to lay off workers, causing a 24.9% unemployment rate in 1933. Today’s price swings seem mild in comparison.

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As an undergraduate, I studied computer science and mathematics. My mother, subsequently, started directing all of her computer tech support questions to me and was, in a way, less than impressed with the education I had received. My father, on the other hand, asks for investment advice whenever I go to visit and doesn’t like when my advice is “don’t even try unless your name is Warren Buffett.” (In related news, check out the Efficent-Markets Hypothesis.)

Apparently I am not along in this situation, so Greg Mankiw has put together a handy primer on what economists can say about investing in the stock market. My advice is to pay special attention to the part about owning stock in your employer.

In January, 157,000 jobs were added, not much more than the 150,000 minimum required for healthy economic growth.  What else stayed remained lackluster? The unemployment rate rose a bit, to 7.9%, as did the number of unemployed, increasing from 12 million to 12.3 million. Combined with the contraction in economic growth in December, you would think skittish investors would drive the stock market down.

Instead, the Dow is closing in on its record of 14,164.43 set in 2007. Why? The Bureau of Labor Statistics revised the numbers up substantially for November (161,000 to 247,000) and December (155,000 to 196,000). In addition, construction jobs increased, signally a strengthening housing market. Third, Wall Street is just plain relieved we didn’t fall off the fiscal cliff and aren’t headed for a debt ceiling crisis — at least for now. Investors have been so battered by crisis and catastrophey for so long that now no (bad) news is good news.

Job increases were across the board:

• Retail –32,600.
• Construction — 28,000.
• Health care — 27,600.
• Leisure and hospitality — 23,000.
• Information — 9,000.
• Manufacturing — 4,000, including 2,5000 in automotive.
• Financial activities — 6,000.

The losers were not surprising.

• Government — 9,000 (probably getting ready for sequestration).
• Temporary help — 8,100 (letting go of workers after holiday shopping season).

(Source: BLS, Employment Situation Summary ).

What This Means for You

Wall Street optimism despite lackluster economic news means its time to review your investments. Already, yields on the 10-year Treasury note area above 2%, as investors switch from bonds to stocks, which offer a higher return. Now’s the time to take out any auto, furniture or home equity loans, as rates will probably not be this low again in our lifetimes. Talk to your financial planner about rebalancing your portfolio. Although the job market hasn’t improved appreciably, it will sometime this year IF we get through the budget issues facing us this spring.

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In January, 157,000 jobs were added, not much more than the 150,000 minimum required for healthy economic growth.  What else stayed remained lackluster? The unemployment rate rose a bit, to 7.9%, as did the number of unemployed, increasing from 12 million to 12.3 million. Combined with the contraction in economic growth in December, you would think skittish investors would drive the stock market down.

Instead, the Dow is closing in on its record of 14,164.43 set in 2007. Why? The Bureau of Labor Statistics revised the numbers up substantially for November (161,000 to 247,000) and December (155,000 to 196,000). In addition, construction jobs increased, signally a strengthening housing market. Third, Wall Street is just plain relieved we didn’t fall off the fiscal cliff and aren’t headed for a debt ceiling crisis — at least for now. Investors have been so battered by crisis and catastrophe for so long that now no (bad) news is good news.

Job increases were across the board:

• Retail –32,600.
• Construction — 28,000.
• Health care — 27,600.
• Leisure and hospitality — 23,000.
• Information — 9,000.
• Manufacturing — 4,000, including 2,500 in automotive.
• Financial activities — 6,000.

The losers were not surprising.

• Government — 9,000 (probably getting ready for sequestration).
• Temporary help — 8,100 (letting go of workers after holiday shopping season).

(Source: BLS, Employment Situation Summary ).

What This Means for You

Wall Street optimism despite lackluster economic news means its time to review your investments. Already, yields on the 10-year Treasury note are above 2%, as investors switch from bonds to stocks that offer a higher return. Talk to your financial planner about rebalancing your portfolio.

Now’s also the time to take out any auto, furniture or home equity loans, as rates will probably not be this low again in our lifetimes. Although the job market hasn’t improved appreciably, it will sometime this year IF we get through the budget issues facing us this spring.

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Manufacturers’ orders for durable goods rose a welcome 4.6% in December, to $230.7 billion. This was a huge increase over November’s orders, which were up just .7%.

Although not a well-known as the employment report, the durable goods report is an important leading economic indicator.  Why? Durable goods are actually long-lasting business equipment, such as machinery, automobiles and aircraft.  Since this report focuses business orders, not consumer purchases, it’s an early indication of how confident businesses are in the economy.  If they think we are headed for a recession, they will delay ordering this expensive durable goods.

December’s orders, just like September’s 9.9% jump,  were buoyed by aircraft orders. Aviation Capital Group (ACG) ordered $6 billion worth from Boeing, despite the problems with the 787 Dreamliners. ACG bought 60 737 MAX airplanes. This product has been very successful for Boeing, bringing in more than 1,000 orders to date.

Year-over-year, durable goods orders were up 7.34%. That’s been about the average for the last year, and supports that the business cycle is solidly in the expansion phase. For calculations, see Durable Goods Spreadsheet in Google docs.

Durable goods shipments rose 1.3% in December, similar to November’s 1.8% increase. Shipments are a lagging indicator because they occur once the product has already been ordered and built. However, they do contribute to the quarterly Gross Domestic Product (GDP) report. Based on the past quarter’s durable goods report, I expect Q4 GDP (out Wednesday) will be around 2% – barely within the healthy growth range.. (Source: Census Bureau, Advance Report on Durable Goods, December 28, 2013 )

What This Means for You

January’s stock market rally is confirming what we already knew — the economy has been growing despite last year’s uncertainty around the fiscal cliff.  Congress is now focused on gun control. This is an important issue, but probably not one that will hold the economy hostage. Now that debates over the debt ceiling and sequestration have been postponed for a few months, expect continued economic growth for the first quarter of 2013.

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Photo: Boeing 737 MAX

The New Year started off on the right foot, with the S&P 500 closing above 1500 for the first time in five years. This milestone followed five days of straight gains, another first since 2007. This important stock market index has risen 5% in January alone, signaling the return of optimism on Wall Street.

Similarly, the Dow Jones Industrial Average rose to within 270 points from its record high of 14164.53, reached in 2007.  In other words, we are only a few short months (possibly weeks) from the stock market regaining all the ground it lost during the 2008 financial crisis. That’s something to celebrate!

 

What It Means to You

There are three things that support investors’ confidence. First, and most important, is that Washington seems to have given up trying to push the U.S. economy into catastrophe. The fiscal cliff has been resolved, or at least postpones. The debt ceiling has been extended for a few months. It seems the battle between parties has shifted to gun control. While this is an important issue, it won’t create an economic stalemate.

Second, the housing market is recovering. Even if it’s in fits and starts, all the signals are there to show it is definitely improving. In some markets, like Phoenix, many sellers are getting more than their asking price. Foreclosures are very difficult to even get, thanks to competition from investors.

Third,  earnings are improving. Many companies have adjusted to the post-recession world, and marketed products to consumers who are looking for value. There has been a lot of cash sitting on the sidelines, both from investors and in corporate coffers. That money is looking for a higher return than Treasuries. Expect this bullish trend to continue.

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In a recent article, The Wall Street Journal asked if the “dividend revolution” was finally here.  The story pointed out that:

In 2012, companies in the Standard & Poor’s 500-stock index will pay out regular cash dividends of $281 billion, predicts S&P Dow Jones Indices. That is 17% higher than 2011 and 13% above the previous record in 2008–without even counting all the dividends that companies might have paid in January but have shifted into 2012 to give their shareholders a tax break.

This could be just the beginning of a long-term change in the way companies treat cash and their outside shareholders. If it continues, investors will end up vastly better off than they are now.

If it turns out to be the case, I think most new investors will be far better off than they are now because it is easier for people to understand cash that shows up in the bank or a brokerage account.  It’s one thing to own shares of a retailer that fluctuates like crazy and you don’t understand.  It’s quite another to own shares of an oil company that sends you checks four times a year.  No matter what happens to the stock market, as long as those checks grow year after year, most people are going to act more rationally than they otherwise would.  Selling early would mean giving up that cash.

British stocks have been paying far richer dividends than their American counterparts for the past few years.  It looks like the United States might be seeing a change in corporate culture that could make us more like our cousins across the pond.

In 2012, business leaders waited for the outcome of one uncertainty after another. As a result, it seemed the economic spark never got enough oxygen to really burst into flame, even though the fuel was there.

The biggest contributor was the 2012 Presidential election. It was a very close race between two candidates with radically different approaches to stimulating economic growth. The race itself slowed economic growth, as businesses waited to see what direction the country would take.

The second largest contributor was from the ever-pending fiscal cliff. Uncertainty over future tax rates kept $1 trillion of corporate expenditures on the sidelines, waiting for a resolution before it could be safely invested.

In the first half of the year, many businesses were waiting to see whether Obamacare would be shot down by the Supreme Court on June 28, 2012. It wasn’t, but this uncertainty slowed business expansion in the first half of 2012.

The Eurozone debt crisis also wreaked havoc with the U.S. stock market. Uncertainty over whether the European Central Bank (in other words, Germany) would prevent Greece, Spain and Italy from defaulting on its debt sent the Dow down 1,000 points in May.

On a lighter note, some investors were waiting to see if the world would end on December 21, 2012, as predicted (some said) by the Mayan Calendar. Fortunately, it didn’t, so we can find out how the other less-catastrophic uncertainties will resolve in 2013.

With all this uncertainty, why did the economy keep growing?

First, the Federal Reserve kept feeding it fuel, in the form of more monetary stimulus. The Fed relied on various forms of quantitative easing, announcing QE3 in September, and QE 4 in December 2012. This kept interest rates low.

Second, foreclosures started to abate after Federal Courts. As a result, the housing market got better

Third, consumers had waded through a lot of their debt, and resumed shopping. This was despite a lower credit card use. However, the Fed monetary stimulus resulted in lower consumer lending rates. This allowed people to take on auto, furniture and education loans.

What It Means to You

Ignore any prophets of economic doom. The U.S. economy continued to grow in 2012, despite all the uncertainty. The fiscal cliff will be resolved — perhaps with two steps forward, one step back — but there is a sea change in Washington, and the process reflects that. The strength of the U.S. economy is powered by the creativity, inventiveness and durability of the American people and businesses It was not and will not be stopped, even by pur elected officials.

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