March Market Madness

During this time last year, the NCAA canceled March Madness. With college basketball off the table, we were given a different type of madness: Market Madness. The S&P 500 drew down a total of 34% from peak to trough as COVID-19 wreaked havoc across global markets. This week marked the one year anniversary of that drawdown’s market bottom.

In September 2020, we wrote about the astounding fiscal and monetary policy action delivered by both the Federal Reserve and congressional lawmakers in response to the coronavirus. Although we complimented both the central bank and congress, the 2020 Most Valuable Player award quite honestly belongs to Jerome Powell and the Fed.

Today, after fending off last March’s Market Madness, the ball is no longer in the Fed’s court. Instead, The Fed is embodying a more reactive approach, awaiting signs of inflation to cross their 2% target before considering rate hikes or tools such as yield-curve control. Now, it’s our congressional leaders’ turn to play offense using fiscal policy. Their most recent time-out play is the $1.9 trillion stimulus package with embedded $1,400 stimulus payments expected to boost inflation.

Is Inflation Bad?

Let’s take a step back and consider why the Fed is setting a target with inflation. It’s important to distinguish that inflation isn’t as daunting as what’s ingrained in our history books. Sure, the inflationary tales of Zimbabwe and the Weimar Republic might seem scary, but the truth is such situations are rare and due to mismanaged policy in less-developed nations. Typically, mild inflation is a sign of rising consumption and increased demand. Today, this type of inflation can be recognized as reflation1; and in our case, reflation would signify that a return to normalcy is en route. 

Market expectations for inflation are no laughing matter. A re-opening is expected to usher in increased spending in the form of pent-up demand. Input prices such as lumber and copper are already soaring. The five year breakeven treasury rate, which measures investor expectations for inflation, rose to its highest over point ever since 2014. Bonds, whose kryptonite is inflation, witnessed a sell-off that trickled into tech stocks.

But are markets correct to expect this much inflation? Or are markets overshooting their expectations by falling for this inflation pump fake? Perhaps our stay-at-home habits will prevail in the long-run and spending will not stay elevated, resulting in lower inflationary pressures. If so, we could see a rebound in bond prices and tech names. Nevertheless, this is the hotly debated topic among investors at the moment. 

Run The Play

This brings us back to the analogy with our administration’s most recent time-out-play. The $1.9 trillion relief bill is bringing hope to the workers, businesses, institutions, and communities that have struggled throughout this pandemic. As you can see in the chart below, the $1,400 stimulus payments represent a large percent of the package totalling $422 billion. It makes sense for investors to expect increased inflation as consumers now have higher disposable incomes and propensity to consume – but there is a catch.

Source: Committee For a Responsible Federal Budget (CRFB)

What will happen to actual inflation if these stimulus payments don’t make it back into the economy, but instead find their way into the stock market? A survey by Deutsche Bank revealed that individuals between the ages of 25 to 34 intend on placing 50% of the received payment into the stock market. Ultimately, the survey found that younger and high income earners eyed the stock market as the targeted destination for this income.

Source: Deutsche Bank Asset Allocation, dgDIG, RealVisionFinance
Data presented on 3/08/2021

The Deutsche Bank survey, like any other, is going to be scrutinized for sampling error, but we don’t see something like the above being too far-fetched. The recent retail frenzy with “meme stocks2” like GameStop, Blackberry, and AMC has given rise to retail investing. Popular communities like r/WallStreetBets on Reddit have become a breeding ground for investors to commingle. Even more likely are your neighbors, who watched people get rich on the market’s 2020 rally, itching to pummel some of their stimulus money into the S&P 500.

These $1,400 payments are intended to increase demand for goods and prompt businesses to hire more workers, eventually raising wages. If these payments seek risk-assets instead, we could see a halt in the reflation narrative and a prolonged unemployment recovery.

Another risk to consider is the risk of financial stability. We’re seeing speculative behavior, especially from retail investors piling into stocks with less regard for the underlying fundamentals. At the end of the day, it’s quite possible to see a lack of wage growth in the economy while management teams of inefficient and highly-indebted companies get rewarded for little to no profitability.

The Bottom Line

We aren’t here to debate whether or not you should save or spend the money, let’s leave that to Reddit and Twitter. However, should a substantial portion of stimulus payments see capital markets as a more attractive destination than the underlying economy, the risks to reflation and financial stability must not be overlooked.     

We’ll see whether or not the $1.9 trillion time-out play will win the economic recovery game and prevent further Market Madness… if not, let’s hope it at least takes us into overtime.


  1. Reflation represents increased price levels as a result of monetary or fiscal policy as a means to combat deflation.  
  2. “Meme stocks” are stocks that have gained traction from retail audiences such as Reddit or investment communities. GameStop and AMC are just a few of the many names with this retail comradery, earning these stocks the nickname “meme stocks” and causing a surge in prices throughout early 2021.


Committee For a Responsible Congressional Budget 

Deustche Bank Survey


Phillip Law, Portfolio Analyst

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Gold Rush of 2020

In 1848, thousands of people grabbed their shovels and crossed land and sea to Sutter’s Mill with hopes of striking gold. Almost 150 years later in 2020, a similar parallel is happening not in San Francisco, but rather in the investable market for this hot commodity.

Year-to-date (YTD), gold has experienced more inflows than other broad stock and bond funds, including SPY and AGG which track the S&P 500 and Barclay’s Aggregate Bond Index, respectively. Amongst a myriad of asset classes, investors are choosing gold as their choice for safekeeping, thus driving gold prices to an all-time high. This year alone, gold is up 33.53% YTD compared to U.S. Stocks at 4.69% YTD and U.S. bonds at 7.83% YTD. But why exactly is a gold rush taking place in 2020?

Source: YCharts

Data as of 8/05/2020

You may attribute the surge in gold prices to the pandemic, but mine deeper and you will find more.

Source: YCharts

Data as of 8/05/2020

Source: YCharts

Low Yield Environment: Earlier in March, the Federal Reserve cut the federal funds rate to 0 – 0.25% to stimulate the economy amid an economic crisis. As a result, treasury yields fell drastically. The 10 Year Treasury rate started the year at 1.88% and now only yields an all-time low of 0.52%, or -1.05% adjusted for inflation. Although treasuries are often used as a safe haven during uncertain times, negative real yields alongside inflation expectations might make gold a more attractive store of value.

Inflation Expectations: Fiscal stimulus through a $2.2 trillion package, rapid money printing, and unprecedented quantitative easing has prompted investors to seek gold as an inflation hedge. Current levels of inflation, however, do remain low at 1.19% year-over-year relative to the Fed’s target of 2.0%, and are likely to stay low in the short term (due to aggregate demand and supply shocks). While there is no tell-all sign indicating future long-term inflation is upon us, the following is certain: whether gold investors are overreacting or whether U.S. inflation is a ticking time bomb remains to be seen.

A Weakening U.S. Dollar: With fiscal debt as a percentage of GDP and M2 Money Supply at an all-time high, confidence in the U.S. dollar is diminishing relative to other currencies including the Euro. This comes at a time where the European Union appears to maintain a tighter grasp on COVID-19 outbreaks, alongside newfound unity in the form of a centralized stimulus package and debt mutualization. Overall, supposed weakness in the U.S. dollar has turned investors towards gold to maintain the purchasing power of their greenbacks.

With this context, it seems like anyone would jump at the chance to own gold; but to avoid grabbing a handful of pyrite (fool’s gold), let’s evaluate gold’s performance and properties as an asset class. During the 1980’s and 1990’s, gold yielded less than ideal returns. In the late 2000’s, the metal’s performance accelerated as investor confidence faltered during the Great Recession, but subsequently dipped in the 2010’s when the U.S. economy proceeded onto its longest economic expansion.

Source: YCharts

Data spanning 1/01/1980 to 12/31/2019

Based on history, we can draw two conclusions: 1) gold’s volatile nature indicates that its current run may not be sustainable over long periods of time and 2) gold’s performance suffers when investors regain confidence and begin to adopt a risk-on posture. To see gold’s performance coming out of recessions, see Appendix A. (link)

5-Year Correlation Matrix (Rolling Monthly Returns)

Data as of 8/07/2020

Source: YCharts

Gold generates zero passive income, so why do investors hold it? One reason is simply because it’s different and provides a diversification benefit. This metal exhibits less correlation compared to broader asset classes, meaning it simply behaves differently. A correlation of 1 indicates that the assets’ return behaviors are identical, while a correlation of -1 means they move in completely opposite directions. Given gold’s weaker correlations, it is likely to thrive when stocks or other asset classes experience large drawdowns. In other words, gold zigs while others zag.

Having understood the nuances of gold as investable asset and its diversification benefit over a long-time horizon, Warren Street Wealth Advisors previously made the decision to maintain gold exposure through Gold Minishares (GLDM) in our Diversifiers sleeve. Our investment strategies are now reaping the benefits of gold’s recent rally and allow for different courses of action. For example, with current gold prices bid up relative to historical levels, we can trim profits to invest in cheaper assets classes with higher potential for appreciation. This in essence, is buying low and selling high.

Gold prices will likely stay in the headlines and continue to gain traction in coming months. Regardless, we encourage you to start with your long-term asset allocation in mind and refrain from overthinking market entry/exit timing on any specific asset class. Preventing permanent capital impairment and building portfolios for your short term and long-term needs remains our top priority. We will diligently tax loss harvest and perform recurring rebalances along the way to take advantage of tactical long-term opportunities we see appropriate. That to us, is striking gold in 2020.

Appendix A:

Phillip Law

Portfolio Analyst, Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss.