The Stimulus Effect: On Equities, Bonds and Gold

Unlimited central bank stimulus was the big surprise of 2012. And along with the stimulus came some odd market reactions.

Let’s take a look at the S&P 500 (green), 10-year Treasury bonds (white) and gold (yellow) chart below.

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First, equities…

The Fed’s stimulus pumped up stocks in 2012. The stimulus inflated consumer demand, which padded corporate income statements. It also gave a general tailwind to risk assets as wealthy investors searched for the benefactor of the Fed’s aggressive programs.

The S&P 500 is up about 13.5% on the year, despite suffering through two pullbacks of about 8% and 10%. Those dips gave buyers a chance to join the uptrend that has persisted since the market bottomed in March 2009. But they also likely shook out “weak hand” long investors. Equities are now recovering from the mid-September to mid-November selloff, but the rally is fragile and we’ve yet to get over the year’s high around 1,460.

Next, 10-year Treasury bonds…

These rallied strongly from April into late-July in response to the Fed’s stimulus plans, but traded sideways from August onward. They ended the year up 4%.

The Fed will continue buying bonds in 2013. This will put upward pressure on bond prices, especially at the long end of the curve. With the expiration of Operation Twist, the Fed won’t be buying short-dated bonds to counterbalance their purchase of long-dated bonds.

And while the U.S. continues to look relatively better than our global counterparts, the bond market won’t write the Fed a blank check for truly unlimited stimulus. Watch for rates to spike in 2013 when the market’s fear of a global slowdown overcomes the feeling that the U.S. is merely the best of a bad bunch in a world of sick economies.

And finally, gold…

Gold couldn’t get above $1,800/ounce this year. It tried twice and failed twice.

This is a warnrning sign against the backdrop of heavy central bank stimulus globally this year. Gold should have trended higher as each central bank anteed up their stimulus programs. That trend just never materialized.

Gold is still vulnerable to a major crash this coming year. Don’t be surprised to see one final blow-off rally, then a fast and steep drop as gold bugs capitulate to a “new normal” of central bank stimulus.

If you haven’t done so already read the Survive & Prosperissue on “The Next Stock Market Crash Starts by Mid-Year.



Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.