Unravelling the factors behind surging US stocks, gold prices, and the dollar’s strength.
The US stock market has been doing very well in the past two years. It has gone up by about 40% since Joe Biden became president, the dollar has become stronger against other currencies and gold prices have also hit a new high. Economists are trying to understand why the three pillars of the modern US market are still holding strong despite current geopolitical scepticism.
The Complexity of Immiscible Factors
Some think that people are anticipating political problems so they are buying gold, but that doesn’t explain why the stock market is doing so well. The Vix volatility index has gone down, which might explain why the stock market is doing well, but that doesn’t explain why gold prices are so high. One possibility could be that the rapid advancement of AI has been a major catalyst for the stock market boom, particularly benefiting companies like Nvidia. However, the broader market rise, including sectors beyond technology suggests that other factors are also driving the bullish sentiment. These factors may include economic recovery, low interest rates, strong corporate earnings, investor optimism, and geopolitical events.
Impact of Rising Interest Rates
The US government has been increasing interest rates over the past few years. This means it costs more to borrow money. Normally, when interest rates go up, people tend to invest their money in bonds instead of stocks because bonds offer a guaranteed return. This usually causes stock prices to go down. Similarly, when interest rates rise, the value of gold often goes down. This is because gold is often seen as a safe investment, and when interest rates are high, people might choose to invest in other assets that offer a guaranteed return. However, recently, both stocks and gold have been increasing in value, even though interest rates have been going up. This is unexpected and has puzzled many investors. It suggests that there may be other factors at play, such as strong economic growth or increased demand for these assets, that outweigh the effects of rising interest rates.
Expectations of Future Monetary Policy
Some people argue that the recent rise in stock and gold prices can be explained by expectations of future US monetary policy. They believe that investors are anticipating the Federal Reserve to start lowering interest rates later this year. This expectation, they say, is driving up the prices of stocks and gold, as investors anticipate a more favorable environment for these assets. However, there’s a strong argument against this explanation: the strength of the US dollar.
Over the past three years, the US dollar has become significantly stronger, increasing by about 14%. If investors were truly expecting lower interest rates or a looser monetary policy, the US dollar would have likely weakened during this time.
Diversification and Dollar Strength
The strength of the dollar suggests that the rise in stock and gold prices may be driven by factors other than expectations of future monetary policy. It’s possible that other economic conditions, such as strong corporate earnings or increased investor confidence, are contributing to the upward trend in these assets. Some people suggest that the rise in gold prices is due to countries diversifying away from the US dollar, especially those that might have tensions with the United States, like China. However, if this were the main reason, we would expect the US dollar to be getting weaker, not stronger. In fact, the US dollar has reached a 20-year high, which contradicts this explanation. Additionally, there isn’t much evidence to support the idea that increased tensions between the US and China are causing countries to move away from the US dollar.
Role of the Strong US Economy
This growth is partly due to strong consumer spending, which government initiatives like the Chips and Science Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act have supported. The Chips and Science Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act are three major pieces of legislation passed by the US Congress in recent years. These acts aim to address critical economic and societal challenges. The Chips and Science Act focuses on strengthening domestic semiconductor manufacturing, while the Infrastructure Investment and Jobs Act invests in modernising America’s infrastructure. The Inflation Reduction Act addresses climate change, healthcare costs, and the national debt through investments in renewable energy, tax credits, and prescription drug reforms. Collectively, these acts represent significant government efforts to stimulate economic growth, enhance technological competitiveness, and improve the quality of life for Americans. These policies helped boost the economy in 2021 and 2022.
A possible explanation for the simultaneous increase in stock prices, gold, and the US dollar lies in the strong US economy. Despite slowing down to 2.5% in 2023, the US economy still grew faster than the average growth rate for the 21st century, which is around 2%.
Investor Confidence
For the past three years, the US economy has consistently performed better than expected. Many experts and the public thought that the US was about to enter or was already in a recession a couple of years ago. However, the economy has continued to grow, defying these predictions. In 2021, the US economy grew at an exceptionally fast pace. Even in 2022 and 2023, despite many people predicting a prolonged economic slowdown, the economy continued to surprise with positive growth. This trend has continued into 2024.
Close Observations for the Future
While both Democrats and Republicans are hesitant to cut government spending to reduce the national debt, investors from around the world continue to invest in US assets. This shows that they have confidence in the US economy’s stability and ability to withstand challenges. Every time the US economy grows more than expected, the demand for US stocks, gold, and the US dollar increases. But at the end of it all, it remains uncertain whether these trends will continue after the presidential election in November.
