Yesterday's market action was something else!

SMI investors who have enjoyed the steady gains in gold and long-term bonds through most of 2020 got hit with both barrels, as gold had its worst absolute daily drop in seven years (and its worst percentage drop since March 13 of this year), while Treasuries also fell sharply. Stocks were almost an afterthought, but they fell modestly also.

What was going on to cause such a dramatic disruption?

There are always "causes" given for moves like these. Yesterday's included hopeful vaccine news (from Russia!), which supposedly caused investors to become more hopeful about the broader economic recovery. There was also an unexpected jump in inflation, which is always the enemy of bond yields (though often a positive for gold).

As often as not, these "reasons" are merely catalysts for investors to do what they've been wanting to do anyway. In this case, consider that from June 8 – August 6 gold (GLD) had risen a stunning +20%, long-term Treasuries (TLT) were up +9%, while stocks (SPY) were up just +3.5%. Those are really big gains for what are normally relatively conservative asset classes. In gold's case particularly, the upward action had dramatically accelerated over the prior three weeks.

It's not nearly as entertaining to attribute a big correction to "investors were simply booking some gains after a long winning streak," but that's actually what happens in healthy bull markets. Markets periodically retrace a bit of ground, some "weaker hands" who came late to the party get shaken out, and the bull market resumes. That's what I think was going on yesterday.

Looking ahead

The longer-term setup still seems like "heads I win – tails you lose" for gold. If the massive government/central bank liquidity stream is successful in propping up the economy without triggering inflation, there's no way they're going to be able to take that cookie jar away, which is super bullish for gold. And if at some point it triggers inflation, well, that tends to be bullish for gold as well.

Bonds are a different story as they're going to tend to respond more to the actual economy, but at this point there's more hope than evidence in terms of the recovery.

At some point, the economic situation will change for the better. As that happens, the long-anticipated rotation out of the handful of reliably growing tech stocks and into the rest of the market will occur. Perceived safe-havens such as gold and bonds probably will take a hit at that point as well. We've seen the market head-fake that move numerous times over the past four months, but each time it has been short-lived. That will likely continue to be the case until the actual economic facts on the ground change.

Unfortunately, that day still appears to be somewhere off in the future. Gold and bonds continue to be an excellent consolation prize until then.