Which is a better investment: buying a home or investing in stocks?
Since 1995, stock prices have outperformed home prices by a factor of four, but which is actually the better investment for building wealth?
U.S. stocks fell, with gold and silver posting their biggest single-day declines since 1980 after President Donald Trump announced he would choose former Federal Reserve Governor Kevin Warsh to be the next Fed chairman.
Warsh, currently a fellow at the Hoover Institution and a lecturer at the Stanford Graduate School of Management, will need Senate confirmation to succeed Jerome Powell at the top of the Fed when his term expires in May. Warsh is seen as the most hawkish of the group, having won the nomination over BlackRock executive Rick Rieder, current Federal Reserve Director Christopher Waller and current National Economic Council Director Kevin Hassett.
Because hawks are wary of inflation, they tend to favor high interest rates to combat inflation, compared to doves, who generally favor low interest rates to promote economic growth.
Mr. Warsh’s nomination eliminates uncertainty about Mr. Trump’s selection as the next Fed chairman, but his confirmation remains uncertain. Sen. Thom Tillis (R-North Carolina) said he would oppose Warsh’s confirmation until the federal criminal investigation into current Fed Chairman Jerome Powell’s handling of renovations at the Fed’s headquarters is resolved.
Stocks, which typically thrive in a low-interest-rate environment, are also weighing the pros and cons of the possibility of a hawk in power who is reluctant to cut interest rates, which President Trump has repeatedly called for.
“[Warsh]has historically been a hawk on monetary policy and will naturally want to stay on Trump’s good side, but this should help temper expectations that the Fed will start cutting rates indiscriminately once he takes office,” Quilter portfolio manager Stuart Clark said in a note to investors.
Ultimately, Warsh’s appointment is seen as a good choice, experts said. “Over the long term, Warsh’s appointment strengthens the prospects for policy continuity and institutional credibility,” Seema Shah, chief global strategist at Principal Asset Management, said in an email. “That stability should be far more important to the market than the kind of sudden reactions we’re seeing today.”
Mark Marek, chief investment officer at Sievert Financial, said Warsh could prevent a market meltdown as Fed chair if investors believe there is an artificial intelligence bubble.
“A monetarist-led Fed will tighten the filters on even the most spend-happy AI players, leaving us with only those who can afford it. Could a bubble have just been avoided?” he said in an email.
The S&P 500 composite index closed 0.43% (29.98 points) lower at 6,939.03, but still managed to gain for the month. The blue-chip Dow Jones Industrial Average fell 0.36%, or 179.09 points, to 48,892.47, while the tech-heavy Nasdaq fell 0.94%, or 223.3 points, to 23,461.82.
The benchmark 10-year US Treasury yield rose to 4.247%.
“Bond markets have always been captured earlier than equities and were quick to price in the lower likelihood of aggressive easing, which is why yields rose,” Malek said.
Is Warsh a Goldstopper?
Gold prices rose to record levels this year amid geopolitical and economic uncertainty. The U.S. economy is showing slowing job growth and inflation remains above the Fed’s 2% target, with some economists expecting it to rise further this year.
But Mr. Warsh and his past reputation as an inflation-fighter sent gold prices plummeting. Gold fell more than 9%, or nearly $500, to $4,871.30 an ounce. Silver also plunged more than 27%, its biggest single-day drop since 1980.
“Gold sold because the hawkish Fed chair candidate signaled less tolerance for inflation and less appetite for financial repression,” Malek said.
Is Mr. Warsh saving the US dollar?
The U.S. dollar reversed some of its decline this year after Warsh’s announcement, with the expectation that he won’t cut interest rates to appease President Trump.
“This seems like it could at least reduce the risk of another big drop in the dollar at this point,” said Francesco Pesole, foreign exchange strategist at Dutch bank ING.
What about the government shutdown?
Mr. Warsh’s nomination as the next Fed chairman has overshadowed government shutdown talks among investors, but the government is expected to enter a temporary partial shutdown this weekend after the Senate failed to pass a funding package on Thursday.
Economists said the negative impact on the economy would be limited if the government were able to reopen next week.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
