How Gold, Bitcoin and Stock Market Sectors and Styles Impact Portfolios
The stock market rally has continued as investors digest the CPI report, which came in at +3.2% year-over-year. So far this year, the S&P 500 has achieved 17 new all-time highs amid steady economic growth, relatively goldilocks inflation, the ongoing rally in the tech sector, and momentum and growth-style factor stocks.
Many other asset classes have also contributed to portfolio gains in this environment. Gold and Bitcoin, for instance, have reached new highs in recent weeks, rising as high as $2,185 and $73,027, respectively.
In times like these, long-term investors need to stay diversified, keep sight of the bigger picture, and avoid chasing the performance of assets that have been working in the recent past.
True financial success is not about timing the market perfectly or going "all-in" on a single investment. Instead, it's about building and maintaining a portfolio tailored to financial objectives that can perform well across all market cycle phases - all-weather portfolios.
The market believes it's a matter of when, not if, the Fed will begin its first rate cut cycle since 2019. The underlying economic trends favor lower rates, but recent economic data have sent mixed signals as to the exact timing.
For example, the latest Bureau of Labor Statistics report showed that 275,000 new jobs were added in February, well above what economists expected. A strong job market means the Fed may hold off on cutting rates since it suggests the economy is doing fine despite tight financial conditions.
However, the same report also showed that the prior two months' job numbers were 167,000 lower than initially believed, while unemployment also ticked up to 3.9%.
Further, this week's CPI report also showed that "core" inflation (CPI that excludes food and energy prices due to their high levels of volatility) came in at 3.8% year-over-year. And "supercore" inflation, which targets the rate of inflation in the service areas of the economy, came in at a whopping 4.46% and marked its 5th consecutive month of (re)acceleration.
All of this muddies the picture of the macro-economy for the Fed and has led many investors to adjust their expectations in favor of a first-rate cut in June or July.
Gold has reached new highs as investors anticipate rate cuts
Historically, gold trades negatively correlated to real interest rates (inflation-adjusted) due to the cross-asset correlation between interest rates and the dollar (USD). Gold can also be viewed as a currency that competes with the dollar.
When interest rates are cut in an inflationary environment, real interest rates are reduced, which puts downward pressure on the value of the USD. This ultimately results in a positive inflow of USD into gold and other risk assets like stocks, commodities, and real estate.
This is especially true when investors are worried about the country's fiscal discipline (it is currently projected to run a $1.6T deficit this year) and geopolitical risks like those in the Middle East and Ukraine. The accompanying chart shows that gold has gained about 35% since its lowest point in 2022, when the Fed was hiking rates rapidly.
Interestingly, the S&P 500 has outperformed gold over this period with a gain of 44% with reinvested dividends. So, while gold has experienced a strong rally and is hovering near all-time highs, keeping its relative performance in perspective is essential.
Bitcoin has jumped sharply for fundamental and technical reasons
Like gold, Bitcoin has also rallied sharply in recent weeks. This is not just due to the possibility of Fed rate cuts, which should benefit cryptocurrencies and other stores of value, but is also related to the approval of spot Bitcoin ETFs in January.
According to news reports, tens of billions in new funds have flowed into these ETFs by providing a simpler and more attractive way to invest in digital assets compared to Bitcoin futures or holding a digital wallet.
On a technical basis, Bitcoin will also experience a "halving" around April, during which the reward for mining will be cut in half. Some investors believe this might help to boost the price of Bitcoin as new supply becomes increasingly scarce.
Whether the rallies in Bitcoin and other cryptocurrencies continue is unclear given the uncertain nature of the asset class, especially after the various corporate collapses, scams, and criminal convictions in the ecosystem over the past few years.
Still, the rapid recovery from the 2022 crash has undoubtedly attracted much investor attention. Similar to gold, long-term investors should view digital assets as part of properly diversified portfolios.
This means that Bitcoin can be considered another asset with specific characteristics. Deciding whether and how much to invest in this asset should be no different than deciding on any stock, bond, currency, commodity, real estate property, etc.
Careful analysis and risk management are needed to understand the potential risks and expected returns relative to other investments.
Many sectors have contributed to S&P 500 returns this year
When it comes to the stock market itself, large-cap tech stocks, including the so-called Magnificent 7, are still the main focus for many investors. However, many other sectors have also contributed to broad market returns this year.
The chart above shows that while the Information Technology and Communication Services sectors continue to lead the market, others, such as Financials, Health Care, and Industrials, have increasingly performed well.
News headlines tend to focus on the absolute best and worst performers in the market. For investors, how an overall portfolio performs is far more critical—not just in terms of returns but also the risk taken to achieve said returns.
So, while large-cap tech stocks have done well for good reasons, investors should keep sight of the many other parts of the market that could also benefit from rate cuts, ongoing economic growth, easing inflation, and a strong labor market.
The bottom line: Investing in gold, bitcoin, tech stocks, or any other asset should be viewed as part of a diversified portfolio rather than as a standalone investment. When appropriate, this can help balance other asset classes, creating a smoother ride toward long-term financial goals.
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Matt Faubion, CFP®
Founder - Wealth Manager