The Fundamental Value of All That Glitters

What drives the fundamental value of art?  NPR reports that it has risen in line with the S&P 500 over the past 60 years but this is odd.  The S&P 500 has risen because the firms have become more productive and therefore more profitable.

Why invest in art? One reason, Price says, is that fine art has a proven track record as a good choice during hard times. “It outperforms in times of economic turmoil and trouble. It has outperformed during all of the wars of the 20th century. It’s outperformed during the last 27 recessions.”

Like any other asset, the market for art goes through ups and downs. Over the past 60 years, the total return on art has been very similar to the return on the S&P 500-stock index, says Mike Moses, a retired New York University business school professor who co-created the Mei Moses World All Art Index. The index tracks repeat auction sales of fine art.

“If you use the last 30 years, the S&P substantially outperforms art,” Moses says. “If you look at the most recent eight [to] 10 years, art has outperformed the S&P.”

But art is more like gold.  It is something pretty and scarce. It turns out that gold has also risen at a similar rate as the S&P500 over the long run (if is reliable) and like art, gold also outperforms the stock market during recessions and has outperformed the S&P during the most recent eight to ten years.

And here is art versus stocks:

It appears that pretty things like art and gold rise in value along with ability to pay that comes from productivity as measured by the stock market.  The stock market does not influence the ability to pay (income) of the median American, but it does reflect the ability to pay of the elites who own most stocks.  Elites also drive the prices of art and gold.

The more surprising thing is that both art and gold tend to outperform the S&P during recessions.  Stocks clearly have irrational volatility that is oversensitive to swings in the business cycle, but why would gold and art be any different?  The answer must lie in the psychology of the elites and since I come from a more median background, it is hard for me to fathom.  When unemployment is rising, and uncertain economic conditions are making stocks plummet is not exactly the kind of time when I would start thinking about expanding my investment in art, but that seems to be what is happening.

Many economists (like Nobel laureate Robert Lucas) say that economists should not focus on the distribution of income, but it is impossible to answer questions about the art market without thinking about the elites who buy art and the struggling artists who produce it. Changes in inequality must be important for understanding this market, but I don’t know how.  Let me know if you figure it out.

Posted in Macro

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