East Money Securities: After reaching a new high, which is more worthwhile to hold, US stocks or gold?

According to the financial news app Zhitong Finance, Dongwu Securities released a research report stating that as of April 2nd, the price of gold (priced in USD) and the S&P 500 index have risen by approximately 11% and 9% respectively. One significant theme in this year's asset competition is the U.S. presidential election. Looking back at the recent elections, both gold and U.S. stocks have performed well, with each having its victories. In 2020, gold claimed the crown of assets, while in 2016, U.S. stocks outperformed. So, facing the election this year, whose potential is greater? Against the backdrop of decreasing economic uncertainty and globally loose neutral policies, the preference leans towards U.S. stocks, especially focusing on non-tech stocks poised for growth. The bull market for gold continues, but the narrative behind it needs to continue fermenting, indicating that there will be some adjustment pressure after a significant rise.

Dongwu Securities' viewpoint is as follows:

So far this year, both gold and U.S. stocks seem to have broken away from "gravity" and joined the competition to set new highs.

Year-to-date, as of April 2nd, the price of gold (priced in USD) and the S&P 500 index have risen by approximately 11% and 9% respectively. One significant theme in this year's asset competition is the U.S. presidential election.

Looking back at the recent elections, both gold and U.S. stocks have performed well, with each having its victories. In 2020, gold claimed the crown of assets, while in 2016, U.S. stocks outperformed. So, facing the election this year, whose potential is greater? Against the backdrop of decreasing economic uncertainty and globally loose neutral policies, the preference leans towards U.S. stocks, especially focusing on non-tech stocks poised for growth. The bull market for gold continues, but the narrative behind it needs to continue fermenting, indicating that there will be some adjustment pressure after a significant rise.

Reviewing the past three election years, it is not difficult to see that both U.S. stocks and gold have left a deep mark on the market:

In 2020, the return on gold reached as high as 25%, leading among major asset classes, far exceeding the 18% rise in U.S. stocks during the same period. The outbreak of the COVID-19 pandemic, coupled with the epic "big water release" by the Federal Reserve, accelerated the rise in gold prices. The year 2020 for U.S. stocks was full of ups and downs, with three circuit breakers triggered due to the pandemic at the beginning of the year. However, after the Federal Reserve successively "played big moves," U.S. stocks surged to historic highs, starting the second half of the year with great momentum. There was a typical "November rally" in the election year, with U.S. stocks rising by 11% that month.

In 2016, U.S. stocks "slightly outperformed," with a return rate of nearly 12%, slightly surpassing the nearly 9% rise in gold during the same period. Against the backdrop of global economic recovery (fundamentals), the Federal Reserve's continued tightening of monetary policy (policy), escalating U.S.-China trade tensions, and market concerns about the policies and positions of candidates (events) intertwined to push up gold prices. During the same period, U.S. stocks benefited from gradually improving U.S. economic data and market expectations for the economic policies of the new president, Trump. The stock market saw a wave of gains at the end of the year, with a 4% increase in the month of the November election alone.

In 2012, U.S. stocks had a better performance, with a return rate of 16%, compared to gold's 8% return rate. Amid the ongoing European debt crisis, global economic growth slowed down, and many central banks implemented loose monetary policies Global economic uncertainty and loose monetary policy have provided support for the price of gold, making it one of the preferred assets for investors to hedge against risks and inflation. With the gradual recovery of the U.S. economy, declining unemployment rate, rising consumer confidence, and the beginning of the recovery in the real estate market, the stock market has risen by 16% throughout the year.

It can be seen that in an election year, both gold and U.S. stocks have relatively bright performances, with U.S. stocks often outperforming. The trend of stocks often represents the "face" of the current government. Looking back at the past three election years, based on data dating back to 1928, the fourth year of a president's term is one of the strongest years for stock market performance. One reason for the strong performance of the stock market in the fourth year of a term is that as the current president approaches re-election, they will do everything possible to give the economy a final boost to increase their chances of re-election.

Looking back at this year, what are the differences?

The most obvious difference, according to the bank, is the decreased sensitivity of gold and U.S. stocks to interest rates, driven by changes in underlying logic. Gold mainly relies on the narrative of the "trust crisis" in the fiat currency system. Whether it is the continuous rise in government debt burdens of major economies in recent years, significant increases in gold reserves by some central banks, or the skyrocketing of Bitcoin, all are important manifestations. On the other hand, U.S. stocks benefit from the expectation of an "economic soft landing/landing + rate cuts," profit expectations brought by AI, and high sentiment, as well as the "political mission" of an election year.

Looking ahead, which is more worth holding, U.S. stocks or gold?

Stocks may have a better risk-return profile than gold. Setting aside the lower holding returns of gold, other aspects are considered:

Drawing from history, gold often experiences a pullback before the Fed cuts rates. Reviewing history reveals that gold typically experiences a decline in the three months before a rate cut. Therefore, as the rate cut cycle approaches, a gold pullback is highly probable. In addition, if we refer to the experience of gold surpassing $1000 per ounce in 2009, a 20% correction may be a hurdle, indicating that there may be some downward pressure around $2400 per ounce.

Under the backdrop of a manufacturing recovery, U.S. stocks have greater resilience in rebounding. Historically, the recovery cycle of manufacturing and the trend of U.S. stocks usually resonate in an upward direction. Whenever the manufacturing PMI rises above the expansion-contraction line, U.S. stocks tend to perform well, with returns significantly higher than gold. In March, the U.S. manufacturing PMI ended a 16-month contraction period, returning to the expansion zone, especially with production and new orders significantly rebounding, indicating that the U.S. manufacturing sector is entering a recovery phase, which will have a significant boosting effect on the subsequent trend of U.S. stocks.

In terms of structure, it is recommended to focus on small-cap stocks > cyclical stocks > technology stocks > defensive stocks. Robust economic growth supports the rise of various stocks, but there is some differentiation in structure. With the recovery of manufacturing, cyclical sectors will gradually become the hotspots pursued by the market, and the yield gap between cyclical stocks and defensive stocks will gradually widen. Additionally, technology stocks, which have been supporting U.S. stocks to continuously hit new highs, may see some decline. Furthermore, small-cap stocks are usually more sensitive to the recovery of manufacturing. Historically, when the manufacturing PMI returns above the expansion-contraction line, the resilience of small-cap stocks in rising is higher than other types of stocks, and there may be significant opportunities for small-cap stocks in 2024 Risk Warning: Global inflation exceeds expectations, the US economy enters a significant recession ahead of schedule, the situation in the Israeli-Palestinian conflict spirals out of control, the US banking crisis resurfaces with financial risks exposed, and the Federal Reserve unexpectedly cuts interest rates