Well this is odd. The S&P hit all time highs again, but rates have plummeted in response to (i) the Fed lowering rates and (ii) fear and uncertainty over trade wars, real wars with Iran, and the broader economic cycle. With the uncertainty, and with interest rates moving lower, the dollar has weakened. With low rates and a weaker dollar, gold has moved higher.

In sum, all asset classes have moved higher. But that is very strange. When yields on treasuries move lower, it typically means the market is pricing in a recession. Gold also moves up considerably in response as investors want to hold an asset that will preserve value. We have to ask ourselves: Who is going to be left holding the bag here? Only one group can be right.

So let’s review the case buying treasuries / gold:

• The economic cycle has been chugging along for 10 years now. A cycle will eventually happen (most last 5-7 years, but they can go on for 20+years). When we do hit a real recession, there will be a flight to quality which should boost treasuries and gold.
• Treasuries and gold will also benefit because of central bank tools: They will likely have to slam rates to zero in order to stimulate the economy.
• Slamming rates to nothing will likely devalue the dollar and cause gold to move higher. Other countries that have held dollars as a reserve will also shift some of that to gold if they feel the US is manipulating the currency.
• If rates are zero, then it follows that the cost of holding gold (negative carry) won’t mean that much since you are earning zero on bonds anyway.

However, all of the positives for treasuries and gold is negated if we do not enter a recession and instead the economy starts booming. It’s not hard to imagine if there is a trade deal with China, rates stay relatively low in the short-term and housing comes roaring back. In turn, the consumer feels good, the stock market is high, and the “wealth effect” permeates the economy.

That is essentially the bull case for stocks as well. While 18x 2019 EPS is somewhat elevated, 16.4x 2020 EPS is not too stretched. However, to get to that level, you need to believe earnings will grow 9.5% next year from 2019’s levels. Not terrible, but possibly a little high. It is much better than the previous expectation fo 13-15% growth just a few months ago.

So which case looks more likely to you? Because of the uncertainty, both options have advanced. It will be interesting to see how this plays out!