Gold Retreats and Stocks Diverge

If you are only watching the headline number for the S&P 500 as it continues to climb to new calendar-year highs, you are missing most of the story. Sure, the index as a whole is doing well, but what about its component parts? How are the individual sectors performing?

It turns out that a massive divergence is forming between the S&P 500’s top performing sector (financials) and its worst performing sector (health care) during the first few weeks of Q2 2019.

Financial stocks – like JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and BlackRock, Inc. (BLK) – are cruising higher because many of them have already released their quarterly earnings numbers, and they are beating Wall Street’s consensus earnings estimates by a fairly wide margin. Investors have reacted to this positive news by buying additional shares and pushing higher the value of these stocks, which are still trying to recover from the beat down they suffered in late 2018.

Health care stocks – like Anthem, Inc. (ANTM), Humana Inc. (HUM) and UnitedHealth Group Incorporated (UNH) – on the other hand, are getting pulverized. Investors are not trying to imagine how these companies’ Q1 2019 earnings are going to look when they report during the next few weeks. Instead, they are trying to imagine how these companies’ earnings could look in the future if Bernie Sanders, or any of the other candidates who are talking about Medicare for All, end up winning the presidential election in 2020.

While nobody knows what the health care system is going to look like in the next five years, investors have shown that they don’t believe margins are going to be nearly as fat for health care stocks, and they’re taking their profits off the table now.

As you can see in the chart below, while the S&P 500 is up 1.39% so far in Q2 2019, the financial sector is up 3.75% and the health care sector is down an astounding 3.99%. We’re still in the early stages of this latest earnings season, but you had better believe that more stories like this are going to play themselves out below the calm bullish facade of the S&P 500.

Speaking of the calm bullish facade of the S&P 500, the index established yet another intra-day high for 2019. The index climbed to 2,916.06 in early trading before pulling back slightly to close at 2,907.06, just below last Friday’s close of 2,907.41.

Qualcomm Incorporated (QCOM) led the way higher with a gain of 23.21% as the company announced that it has come to an agreement with Apple Inc. (AAPL) in which Apple will pay Qualcomm an undisclosed amount to end a years-long international patent battle. According to management, the agreement will add $2 to Qualcomm’s earnings per share (EPS).

The price of gold is frequently used as an indication of investor confidence, or the lack thereof. Oftentimes, when investors are nervous about future economic growth and the instability of the financial markets, they will move a larger portion of their portfolio into this precious metal. Gold is attractive because it can serve as a secure store of wealth during times of uncertainty.

Conversely, when investors are optimistic about future economic growth and the stability of the financial markets, they will reduce the portion of their portfolio that is allocated to gold. In these situations, gold becomes less appealing because it is a non-yielding asset – it doesn’t pay a dividend like a utility stock or offer a competitive coupon rate like a U.S. Treasury.

Today, we saw gold prices break below a key support level at $1,290 per ounce, which formed the neckline of a head and shoulders bearish reversal pattern – in a sign that investors believe the opportunity cost of leaving their assets in a conservative gold position is too high given the current bullish market conditions. Investors would rather have their money in higher-yielding investments.

Seeing this inter-market confirmation of bullish sentiment on Wall Street is a positive sign that investors believe there are more good times ahead.

Individual investors must remain vigilant and ensure that they don’t become myopic in their analysis. It’s far too easy to get comfortable looking at the same indicators day after day.

To prevent this happening to you, dig a little deeper. Dig down past the headline numbers and investigate the performance of individual sectors. Dig down past what is happening in the stock market and look at other financial markets – like commodities and bonds. You’ll be glad you did.

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