Two months. That’s how long the pandemic-triggered recession lasted, from February to April 2020, making it the shortest economic downturn in U.S. history, according to the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee.
For those scratching their heads, the NBER makes clear that this does not mean the economy “has returned to operating at normal capacity,” only that the expansion got off to a (very) slow start soon after the whole world came to a screeching halt in early 2020.
Indeed, the shockwaves of those two months are still being felt: Initial jobless claims remain at elevated levels. Commercial air travel, especially business travel, hasn’t quite fully recovered, though it’s showing signs of improvement.
And then there’s unprecedented government spending and money-printing, which continue to this day. Due mainly to stimulus measures, the U.S. deficit is expected to hit $3 trillion this year; meanwhile, total assets held by the Federal Reserve are on their way to $9 trillion.
A lot of this money has flowed into stocks and other risk assets. According to Morningstar, mutual funds and ETFs saw net inflows of $722 billion in the first six months of the year, the largest semiannual amount going back to 1993. As of the end of 2020, a record $5.4 trillion sat in funds that passively track the S&P 500, Axios reports.
Take a look at the chart below. Investors’ appetite for risk is at an all-time high. Stocks as a percent of households’ financial assets are above 40% for the first time ever. What’s more, Americans are trading on margin like never before. At the end of June, margin accounts totaled an unheard-of $882 billion, up 50% from just a year earlier.
A big part of this story is who is doing the investing. Thanks in large part to $1,200 stimmy checks, there’s been an explosion in the number of retail investors. Ahead of its initial public offering (IPO), Robinhood reports that it now has as many as 18 million users, up almost double from 2019.
As many of you know, Robinhood is favored by younger, less experienced investors because trades are free, and it does a good job making investing fun. The average age of users is 31 years old. Many of them are first-time investors.
Another Taper Tantrum?
Obviously there’s nothing inherently wrong about anything I’ve said up to this point. There’s no reward without taking on some risk. I’m thrilled that more Americans are participating in the stock market, which has done very well since cratering in March 2020. Many young Robinhooders have made some incredibly profitable investments in recent months, including airline stocks.
At the same time, the rate of money-printing we’ve been seeing since the pandemic struck is unsustainable, and if investors aren’t cautious, I’m afraid tears may be shed when policymakers take away the punchbowl.
Remember the 2013 “taper tantrum”? In May of that year, then-Fed Chair Ben Bernanke hinted at a reduction in the pace of the bank’s bond purchases. Treasury yields immediately spiked and stocks fell. And that was when the Fed’s balance sheet stood at a little over $3 trillion, or two and a half times less than what it is today.
For now, current-Chair Jerome Powell says tapering is still “a ways off” as the economy continues to recover. But I urge investors to be prepared for when the party comes to an end, whether that means buying real estate, increasing your exposure to gold and precious metals, investing in Bitcoin and other cryptos or something else.
Remember the 10% Golden Rule
As you’ve heard me say many times, I think one strategy investors may consider is a 10% weighting in gold, with half of that in physical gold (bars, coins and jewelry) and the other half in high-quality gold stocks, mutual funds and ETFs. I also think it could be prudent to have between 1% and 2% in Bitcoin and Ether, including crypto mining stocks. Remember to rebalance regularly, at least once a year, but you could see additional benefits by rebalancing every quarter.
Originally Posted on July 22, 2021 – Investors’ Risk Appetite Is at an All-Time High. That Could Be a Problem
Please note: The Frank Talk articles listed contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
Disclosure: US Global Investors
All opinions expressed and data provided are subject to change without notice. Holdings may change daily.
Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
About U.S. Global Investors, Inc. – U.S. Global Investors, Inc. is an investment adviser registered with the Securities and Exchange Commission (“SEC”). This does not mean that we are sponsored, recommended, or approved by the SEC, or that our abilities or qualifications in any respect have been passed upon by the SEC or any officer of the SEC.
This commentary should not be considered a solicitation or offering of any investment product.
Certain materials in this commentary may contain dated information. The information provided was current at the time of publication.
Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by clicking here or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from US Global Investors and is being posted with permission from US Global Investors. The views expressed in this material are solely those of the author and/or US Global Investors and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
Disclosure: Digital Assets
Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. Eligibility to trade in digital asset products may vary based on jurisdiction.
Disclosure: Margin Trading
Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.
For additional information regarding margin loan rates, see ibkr.com/interest
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.