S&P 500 beating gold most since 1999 on positive earnings

Written by Bloomberg | Updated: Apr 3 2012, 08:21am hrs
The best first-quarter gain for the Standard & Poors 500 Index since 1998 sent US stocks above gold by the most in more than a decade, a sign of growing investor confidence in corporate profits as analysts raise earnings estimates for the first time this year.

The S&P 500 climbed 12%, 5.3 percentage points more than gold for the widest gap to start a year since 1999. The S&P GSCI Total Return Index of 24 commodities gained 5.9% over the three months, while treasuries slipped 1.3%, trailing equities by the most since 2009.

Corporate bonds increased 2.4% and the dollar fell 1.6%. Stocks are diverging from defensive investments, such as gold, as appetite for risk increases. While bulls see it as a sign profits and the economy are gaining traction, bears point to Federal Reserve chairman Ben S Bernankes warnings that more stimulus may be needed as evidence that the rally has gone too far. To money manager Laszlo Birinyi, slower gains in precious metals signal pessimism is starting to fade.

The problem with gold now is that people are starting to accept the economy recovery, said Birinyi, president of Westport, Connecticut-based Birinyi Associates. Even as confidence builds, people are still too focused on the concerns and the fact that this looks similar to last year, where everyone said sell in May and go away, he said. Thats exactly the kind of thing we look for.

The benchmark gauge for American equities advanced 0.8% last week to 1,408.47, bringing the increase for March to 3.1%.

US treasuries lost 1% in the month after S&P 500 earnings expanded for a ninth straight quarter and manufacturing and home sales improved, while corporate bonds dropped 0.6%. The S&P GSCI commodity gauge slipped 2.4% and the Dollar Index, which measures the currency against the biggest US trading partners, added 0.3%.

Record earnings, improved US manufacturing and retail sales, and attempts by European leaders to contain their debt crisis helped stocks rally in the quarter, beating gold as demand for assets that protect against losses faded. Equities pulled ahead in March when Bernanke damped speculation he would carry out more bond purchases, adding to evidence that the recovery is gathering momentum. He said on March 26 that while hes encouraged by the decline in unemployment, more stimulus is needed to create jobs.

The rally in gold may pick up speed should central banks signal further action, according to Ioan Smith, a director at Knight Capital Europe in London. Futures on the metal surged 1.6% on March 26 after Bernanke said the economy needs continued accommodative monetary policy to boost jobs.

If the Fed reinstitutes quantitative easing measures later in the year, coupled with rising fiscal deficits and currency debasement among countries in the developed world, then gold may continue to hold an underlying bid, said Smith.

Fourteen out of 21 primary dealers in US treasuries say the Fed will probably need a third round of bond purchases, or quantitative easing, to bolster the economy, according to a Bloomberg News survey.