Too often, people and bonehead politicians equate the stock market with the economy. They should not do this, the stock market does not equal the economy. Capital markets do not equal economies.

For instance in the United States, a large portion of GDP output and the majority of GDP growth is attributed to small businesses and other businesses that are not publicly traded.

GDP or Gross Domestic Product is one of the numerous measures of the economy

There is a relation between economic cycles and market cycles, but they certainly do not align perfectly. Recessions do not automatically lead to bear markets, bear markets do not automatically lead to recessions. The same can be said about bull markets and economic expansions.

The relative strength of the economy is very subjective, and therefore a perfect weapon for politicians and their rhetoric.

As investors we must be politically agnostic. Whatever our political ideology (I certainly have one) we must ignore it, and look at politics strictly in terms of “how it will move the markets over the next 12-18 months.”

We can vote, and hope for things that in the long-term will have a positive impact on the economy, and therefore have a positive impact on the future of the markets.

When we look out over the next 12-18 months at the political environment we can make one of two big assumptions. Either there will be change/action or there will be status quo.

With change and action comes uncertainty. The markets do not like uncertainty. Also with change and action the government effectively picks winners and losers. The markets react accordingly.

With gridlock, status quo, inaction, whatever you would like to call it comes a certain relief that is usually positive for the markets. When government is unable do get anything done or passed, there is little uncertainty about the more immediate future. Things will continue as they are. In the more short-term gridlock in Washington and governments around the world is typically a big positive for the markets.

My best attempt at a sports/government/market analogy to illustrate this point goes as follows.

The NFL and the referees in a football game are like government. Before the game you the investor bet on one team based on a certain set of rules and assumptions. Equate that to investing in the market in general, a sector, category or stocks, or a particular stock. Then at halftime you get word the NFL has decided to go back to early 1900s rules that do not allow for any forward passes. The government/NFL has completely changed the environment and your assumptions about the environment moving forward. You may decide that you want to change your bet given the new rules, or you may even decide to bet on a different game entirely based on this new information.

There are people out there that have, and will in the future make money “investing” and or really trading in gold. The same can be said about real estate and countless other asset classes. Most people though, do not get good relative returns in gold or real estate. They might have positive returns, and even very high returns, but when compared to stocks over the same investment time period their returns often do not hold up.

That leads me to my very simple explanation for why investors should not look to gold. Gold has not returned nearly as well as stocks over the long-term, and it has been wildly unpredictable. I expect that trend to continue for the next 10, 20, 50, 100 years.

Why would anyone invest in something with lower return, and less predictability? I have no answer for you there. Forget lower returns, gold has gone through long periods of negative and flat returns.

Historically gold hasn’t returned as well as US Treasuries over long-term periods, and once again, it is significantly more unpredictable.

Since 1973 (when gold really began trading freely) to 2009 (period I have this data for), world stocks returned 2,229%. The S&P returned 3,552%, and US Treasuries returned 1,642%. Over this same period gold returned 983%.

There are a lot of trends right now, selling client’s “alternative” asset strategies and portfolios that hold a portion in alternatives like gold. The claim is that having a portion of the portfolio in alternatives will smooth returns. The arguments for owning alternatives like gold, fall apart when one compares returns, volatility, and predictability against asset classes such as stocks, bonds, and cash.

An asset allocation that combines stocks, bonds, and cash makes a lot more sense than trying to time the gold market.