Has the gold rally fizzled? … Bitcoin drops below $30,000 … the Fed faces a data problem … looking at Q1 earnings so far … analysts are calling for double-digit gains from the S&P

Today, let’s cover a handful of the stories that are likely impacting your portfolio.

Is the gold rally over?

The sentiment that was driving gold’s fevered gains is shifting. That means the rally could be over – for the moment, at least.

To make sure we’re all on the same page, two weeks ago, gold came within a hair of setting a new all-time-high. That would have meant taking out the prior high of about $2,059 from summer 2020.

As we’ve noted in the Digest, the timing of this recent surge toward a new high is counterintuitive. Inflation has been dropping… risk-free assets have been offering healthy interest rates… and the stock market has been showing overall strength in 2023…

Why would gold climb in such an environment?

Because investors were buying it as a chaos hedge.

Specifically, investors took a look at the string of regional bank failures, as well as a suddenly-more-dovish-sounding Fed and concluded “the Fed is about to pivot and slash rates because things are collapsing.” For millennia, gold has been the preferred storehouse of wealth during turbulent economic times.

But in the weeks since, fears of an economic implosion have receded. And we’ve seen a return to hawkishness from various Fed members, plus commentary explicitly downplaying any rate-cuts this year.

For example, last week Atlanta Federal Reserve President Raphael Bostic said:

One more move should be enough for us to then take a step back and see how our policy is flowing through the economy, to understand the extent to which inflation is returning back to our target.

If the data come in as I expect, we will be able to hold there for quite some time. Once we get to that point, I don’t have us really doing anything but monitoring the economy for the rest of this year and into 2024.

Put it together and investors are rethinking the gold trade.

Below is how this shifting sentiment appears. We’re looking at gold over the last month.

Despite this, gold’s longer-term attractiveness remains

In fact, there’s a strong argument to be made that it’s more attractive than ever.

According to USDebtClock.org, the U.S. government now owes nearly $32 trillion to its creditors. That’s a cool $247,766 per taxpayer, representing a federal debt-to-GDP ratio of 120%.

(If we add in all of our government’s unfunded liabilities, like Social Security, the overall financial liability per citizen clocks in at $558,752.)

And if it feels like we passed the $31-trillion-mark very recently, that’s because it’s true. We set that record last October. And here we are today, already at $31.703 trillion.

As you can see in the chart below, our federal debt level is accelerating. It’s no longer growing at a linear pace. In fact, it’s closer to a parabolic curve.

This won’t end well.

While our politicians won’t allow our government to default anytime soon, I will note that the U.S. one-year sovereign credit default swap just hit a record high. These default swaps represent the cost of insuring U.S. treasury bonds against the risk of default.

Not too encouraging.

Meanwhile, though inflation is easing today, you shouldn’t expect that to last. Our politicians will do what politicians have done throughout the ages – try to inflate away our debt because it’s too gargantuan to ever pay down.

So, pulling back, if you’re looking at gold as a shorter-term trading vehicle, gains are facing shorter-term headwinds. Be careful if you stay long.

But if you’re looking at gold as a long-term wealth-protection asset, it’s just as needed as ever, if not more so.

Meanwhile, what’s the latest with “digital” gold?

After retaking the psychologically-significant level of $30,000, Bitcoin has fallen in recent weeks as investors took profits, and fears of an economic meltdown abated.

But if our crypto expert Luke Lango is right, this is a buying opportunity, with Luke writing “levels offer a particularly attractive short-term entry point.”

For more, let’s jump to Luke’s weekend update in Crypto Investor Network:

Our “big picture” bull thesis on cryptos remains in-tact.

Cryptos are in the midst of their Fourth Boom Cycle and are following the same trading pattern they followed during the First, Second, and Third Boom Cycles – wherein Bitcoin bottomed 12-16 months before a Halving event after losing ~80% of its value in a bear market crash, retakes about half of those losses into the Halving event, and then goes on to make new highs in the 12-16 months after the Halving event.

Improving financial market sentiment – driven by falling inflation, falling Treasury yields, a dovish evolution in Fed policy, and restabilizing economic activity – will provide strong macroeconomic ammunition for this rally in 2023/24.

Luke explains that shorter-term investors need to be prepared for lots of volatility. He explains this through technical analysis of Bitcoin’s price chart, pointing out that its breakout here in 2023 doesn’t have a clearly-defined support line. This makes it unclear how much Bitcoin could give back as bears try to reassert themselves.

But that issue is shorter-term in nature. Over the longer-term, Luke is calling for significant gains, even referencing one analyst who just made a case for Bitcoin at $180,000 in this new cycle.

Yesterday, CNBC featured a slightly more reasonable price estimate from the crypto shop Standard Chartered. They’re calling for Bitcoin at $100,000 by the end of 2024, stating their belief that the “crypto winter” is now finally over.

Here’s Luke’s bottom-line:

Overall, despite the bumpy week for cryptos, we remain bullish and view this week’s sell-off as a great buying opportunity.

The Fed’s job just became even harder

The Fed wants consistent data that reveals its rate-hikes are slowing the economy.

It’s not getting it.

From Reuters last Friday:

U.S. business activity accelerated to an 11-month high in April, according to a survey on Friday, which was at odds with growing signs that the economy was in danger of slipping into recession as higher interest rates cool demand.

S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 53.5 this month. That was the highest level since last May and followed a final reading of 52.3 in March.

It was the third straight month that the PMI remained above 50, indicating growth in the private sector. The survey data was collected April 12-20.

At the same time, there are all sorts of economic indicators suggesting the economy is slamming on the brakes.

Take the Conference Board’s Leading Economic Indicators Index from last week.

For that, let’s jump to Luke and his Daily Notes in Early Stage Investor:

The Conference Board’s Leading Economic Indicators Index dropped 1.2% month-over-month in March, worse than the 0.7% drop expected by economists. The year-over-year drop worsened from 6.7% in February, to 7.8% in March.

Historically, every time the LEI dropped more than 5% year-over-year, the Fed was either already in the process of cutting rates or on the verge of cutting rates.

We’re down about 8% year-over-year right now on the LEI, and the Fed is still hiking.

As to what the Fed will do with these conflicting data, traders are betting heavily that we’ll see another rate hike next week. The CME Group’s FedWatch Tool puts the odds of a quarter-point hike at 84% as I write Tuesday morning.

It’s what happens in June that isn’t clear.

At the moment, traders believe there’s a 72.6% chance the Fed will pause. Meanwhile, odds are 14.1% for yet another quarter-point hike, and 13.3% for the first quarter-point cut.

We’ll be listening for clues from Federal Reserve Chairman Jerome Powell in his post-FOMC press conference next Wednesday.

Finally, though it’s early, how are Q1 earnings coming in?

The latest compiled data we have are from last Friday.

Let’s go to FactSet, which is the go-to earnings data analytics group used by the pros:

The first quarter earnings season for the S&P 500 is off to a better start relative to the last two quarters. However, both the number of companies reporting positive EPS surprises and the magnitude of these earnings surprises are below their 5- year averages.

The index is reporting higher earnings for the first quarter today relative to the end of last week and relative to the end of the quarter. On the other hand, the index is still reporting the largest year-over-year decline in earnings since Q2 2020.

Overall, 18% of the companies in the S&P 500 have reported actual results for Q1 2023 to date. Of these companies, 76% have reported actual EPS above estimates, which is below the 5-year average of 77% but above the 10-year average of 73%.

In aggregate, companies are reporting earnings that are 5.8% above estimates, which is below the 5-year average of 8.4% and below the 10-year average of 6.4%.

In short, earnings are down, but aren’t down as much as had been previously expected. Of course, remember, we’ve only seen reports from 18% of companies in the S&P. So, plenty more to come.

Before we wrap, I’ll point out that despite all the mixed economic signals, uncertainty about the Fed, and fear of a recession, FactSet reports that analysts expect 12% gains for the S&P over the next 12 months.

Here’s a breakdown of the sectors that analysts believe will perform the best:

At the sector level, the Communication Services (+18.0%), Consumer Discretionary (+17.5%), and Energy (+17.5%) sectors are expected to see the largest price increases, as these sectors have the largest upside differences between the bottom-up target price and the closing price.

On the other hand, the Information Technology (+8.2%) and Consumer Staples (+8.3) sectors are expected to see the smallest price increases, as these sectors have the smallest upside differences between the bottom-up target price and the closing price.

We’ll keep you updated here in the Digest.

Have a good evening,

Jeff Remsburg