A Fear-Based Bull?

Oddly, traditional safe-haven assets like money market funds, bonds, the U.S. dollar, and gold have done well in this bull market. Will this Fear-Based Bull ever become Bullish?

One of the odd and intriguing aspects of the contemporary bull market is the persistently positive performance of traditionally fear-based investments. Normally, fear-based assets like gold, money funds, the U.S. dollar, and higher quality bonds do best during recessions and during times of stock market turbulence. Sometimes, fear-based investments do well early in new bull markets when investors are still deciding whether a recession is truly over and whether a new bull has really begun.

However, once broad-based bullish sentiment takes hold and investors decide the stock market is headed higher, fear-based investments typically lose their luster and languish until anxieties about another bear market/recession reemerge.

For example, during the last bull market in 2020 to 2021, each of the aforementioned fear-based investments actually suffered a loss. Between May 2020 and December 2021, the real trade-weighted U.S. Dollar index declined by about 5%. The U.S. aggregate total return bond index declined by slightly more than 2% between June 2020 and December 2021. U.S. money fund assets (cash) fell by about 2% between June 2020 and December 2021 and the price of gold dropped by almost 12% between July 2020 and December 2021. Essentially, as was the case in the post-pandemic bull market, defensive investments (fear-based assets) usually get dumped during bull markets.

The contemporary bull market, however, has been a bull driven by a very curious couple -- technology stocks and fear-based investments. Is this odd marriage finally ending? Persistently positive results from fear-based assets may be starting to wane. The dollar recently collapsed, and the price of gold just suffered one of its largest two-day drops (almost 8%) of the entire bull market.

My guess is fear-based assets have been able to do relatively well throughout this bull market because the Fed has kept inflationary fears perpetually stoked, and because most economic policies have remained contractionary, keeping recessionary fears chronically elevated. Recently though, the pace of economic growth has weakened considerably easing inflationary fears and boosting expectations that economic policy will soon become more accommodating. If inflation fears subside while improved policy accommodation reduces recession fears, the appeal of fear-based assets may finally be replaced by broader-based investor bullishness during the balance of this bull market.