Ask any average Joe off the street what investment category is at or near record all-time highs, and a good number of them will confidently answer “gold,” (NYSE:GLD) as prices recently eclipsed $1,600 per ounce. But of course this makes perfect sense, right? The Fed is printing money like it’s going out of style, the dollar is collapsing like a drunken sailor, inflation is about to sky-rocket to the moon, and China (NYSE:FXI) is on the verge of becoming the world’s new reserve currency. Never mind that Greece, Portugal and Ireland are in shambles with the Euro on its death bed. Or Japan (NYSE:EWJ) has achieved a debt to GDP ratio that would even make U.S. vote grubbing politicians blush. A sub-3% 10-Year Treasury Note doesn’t appear to discourage fervent gold-bugs either.
While gold has experienced an incredible sextupling in prices over the last decade and hit new-all time highs, believe it or not, there is an unlikely asset class that is reaching new historic highs and has outperformed gold for almost 2.5 years. Can you guess what asset class star I am talking about? If I said U.S. “stocks,” would you believe me? OK, well maybe I’m not referring to large capitalization stocks like Johnson & Johnson (NYSE:JNJ), Microsoft Corp. (NASDAQ:MSFT), Wal-Mart Stores (NYSE:WMT), Intel Corp. (NASDAQ:INTC), and AT&T Inc. (NYSE:T), all of which have effectively gone nowhere in the 21st Century. However, the story is quite different if you look at small and mid capitalization stocks, which have received about as much respect as Rodney Dangerfield.
As a matter of fact, the S&P 400 (MidCap Index) and S&P 600 Index (SmallCap Index) have more than doubled gold’s performance since the lows of March 2009 (SmallCap +149.0%; MidCap +145.1%; Gold/GLD +71.0%). Given the spectacular performance of small and mid-sized companies, I’m still waiting with bated breath for a telemarketer call asking me if I have considered selling my small and mid cap stock certificates for cash – since everyone has melted their gold chains and fillings, a new hobby is needed.
Has the fear trade ended? Perhaps not, if you consider European sovereign debt and U.S. debt ceiling concerns, but what happens if the half empty glass becomes half full. The early 1980s may be a historical benchmark period for comparison purposes. An interesting thing happened from 1980-1982 when Federal Reserve Chairman Paul Volcker began raising interest rates to fight inflation – gold prices dropped -65% (~$800/oz. to under $300/oz.) from 1980-1982 and the shiny metal lived through approximately a 25 year period with ZERO price appreciation. Since there is only one direction for the Fed’s zero interest rate policy (ZIRP) to go, conceivably history will repeat itself once again?
In hindsight gold was a beautiful safe haven vehicle during the panic-filled, nail-biting period during late-2007 throughout 2008. Since then, small and mid cap stocks have trounced gold. Like stocks, Rodney Dangerfield may have gotten no respect, but once fear has subsided and rates start increasing, maybe stocks will steal the show and get the respect they deserve.
Wade W. Slome is a CFA and CFP® at Sidoxia Capital Management.
Disclosure: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in TROW, or any other security referenced in this article.
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