A Lousy Earnings Season Could Prove Gold Bullish
The current bull market in U.S. stocks, now in its seventh year, may be starting to fray at the edges.
Gold has long been thought of as a hedge against many things including declines in paper assets, a vehicle to preserve and grow wealth and an inflation hedge. The start of the current first quarter earnings reporting season in the U.S. could provide fresh fodder for gold bulls as less than stellar results could weigh on stock prices.
Gold prices are stronger Friday, boosted by in part by expectations that U.S. first quarter corporate earnings will disappoint stock investors. The super-charged equity bull, driven relentlessly higher in recent years, in large part by easy-money policies from the U.S. Federal Reserve, is starting to flash warning signals. Analysts are widely expecting earnings of companies in the S&P 500 to slip by 5% in the first quarter. Ouch.
Another signal that the stock market bull may be tiring is the current outperformance of small and mid cap stocks against larger capitalized stocks. Large cap stocks, are in part, seeing depressed earnings performance in the wake of significant gains in the U.S. dollar, which eats into their international sales earnings profits.
The S&P 500 index is up a mere 1.6% year-to-date, while the MidCap 400 is up 5.4% and the SmallCap 600 is up 3.6%.
"The current spike by small-caps could be a warning sign that large-cap stock valuations are stretched and the current bull market has entered its twilight year," wrote Jeffrey Hirsch, editor of the Stock Trader's Almanac in a research note to clients.
If corporate earnings surprise on the downside in the days and weeks ahead, stock investors could begin to shed some holdings amid concerns that an earnings recession may lie ahead. In turn, this could provide additional support for the gold market, as investors look to hedge against what could start to look like a slowdown in corporate America.
The Federal Reserve has been generous with its punch bowl in recent years and the party has been exuberant for stock bulls. But, the Fed is getting ready to pull away the punch bowl. Gold investors have defended dips under the $1,150 per ounce level and that zone has attracted longer-term buying interest. Will that prove to be a strong floor in the months ahead?
By Kira Brecht, |
