When good news is bad news; the case for GOLD – C.J. Lawrence – Market Commentary 12.2.2022

It’s jobs Friday, and the November data shows the US economy continues to add 200,000-plus new jobs. No slowdown there!  That is in line with the stronger than expected Q3 reading for GDP, which was revised up to 2.9% annually.  Hourly wages also came in higher than expected, up 0.6% versus the expected 0.3%.  Why should that be bad news?  It’s not. Markets are selling off today because it fears the Fed.  Stepping back, however, it is important to point out that markets bottomed when yields peaked.  The 10-year Treasury yield peaked on October 21 at 4.32% (now 3.59%), and the 2-year peaked in October at 4.75% at the beginning of November and is now down to 4.37%. Equity markets bottomed in October and are up 14% off the low. This is also good for Bonds, with the Aggregate Bond index (AGG) up 6% for the same period. There is still a lot of work to be done to repair the damage from the 2022 bear market, but we are moving in the right direction. 

Can the Fed defeat inflation and not put the economy into a recession?  Economists and Strategists are saying no, but the economy seems to be sending a different message.  Core inflation is falling, and there are few signs of a broad-based economic slowdown. House prices are falling, but structurally there is a lack of new homes.  Autos are also seeing strong demand but are held back by supply. Technology companies are laying off workers but only account for a tiny part of the labor force. We shall see if this time is different this time. We are, however, becoming more confident that a soft landing in 2023 is likely and that corporate earnings may not be as bad as originally feared. The key is to be selective!

The peak in yields creates an interest opportunity in the gold commodity and mining stocks, in our opinion.  A peak in US Treasury yields usually means a weaker US Dollar ahead.  The Fed’s recent more dovish comments relating to moderating the pace of rate increases led to quite an intraday selloff in the US Dollar and a corresponding rise in the value of gold assets.  We believe this trend may continue into 2023 and accelerate once the Fed pauses.  Another byproduct of a weaker Dollar is higher corporate earnings for our multinationals, especially in the Tech sector, which earn more than 50% of their revenues, in most cases, abroad.  Unless you plan to vacation abroad, a weaker Dollar is welcome for global growth and S&P500 corporate earnings!

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.

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