Man will begin to recover the moment he takes art as seriously as physics, chemistry or money”   Ernst Levy

 

Art fills many needs. Art and artists confer a ‘coolness’ factor onto neighborhoods,  driving communities’ economic growth. Corporations employ it as a way to motivate employees and lend bite to their brands,  and hospitals utilize its transformative power to encourage healing.   All of which helps to explain why, in concert with the current stratospheric rise in global wealth, art continues to attract a broader audience and deliver record-breaking auction results despite a worldwide economy just beginning to realize the effects of speculative excess and inevitable recession. However, even without a dawning realization of the myriad ways in which it impacts our lives, art would still be climbing because, particularly during times of economic distress, art is the asset that both pleases and prospers.

 

During 2007, America’s financial institutions wrote off a whopping $120 billion in assets stemming from the still unfolding subprime mortgage crisis. S&P is forecasting mortgage-related losses above $265 billion when all is said and done, and well-known U.S. banks have already borrowed $50 billion from the Federal Reserve to shore up their reserves. 

 

Meanwhile, the stock market is clearly unnerved by the prospect of a contracting consumer, with the S&P 500 having already lost 8% of its value year-to-date, with 6.1% of that coming in January, the biggest drop since September, 2002. Not to be outdone, the European Dow Jones equivalent lost 12% in January.  And as a result of reduced U.S. interest rates aimed at dealing with the effects of the mortgage situation, the dollar continues to lose value, having fallen 9.5% versus the Euro in 2007, 37% in the last five years. What’s increasing in value you may ask? The answer: the Euro, Gold, Silver, and ART. 

 

“Nonfinancial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence.” (Global Investing: The Professional’s Guide to the World Capital Markets, Roger G. Ibbotson and Gary Brinson).  On February 14th, 2008, Sotheby’s hosted the Red Auction in New York City to benefit HIV/AIDS. The  75 donated works raised $42.6 million, almost $9 million above estimates, and pieces by 17 artists sold for the highest prices they’d ever received at an auction. Ironically, on the very same day former Federal Reserve Chairman Greenspan announced that the U.S. is on the precipice of a recession. 

 

On February 5th, the Dow fell 370 points, the indexes’ worst loss this year, and the eighth worst day for the stock market since 2000. It was also the day that Sotheby’s held its auction of Impressionist and Modern works in London for a record total 116.7 million pounds, 40 million pounds over the prior record set just last June. The sale saw five records broken, with 88% of lots sold, a healthy outcome in any economy. It was also Sotheby’s highest total ever for an auction of Impressionist and Modern art in London. 

 

Just what explains these levels of spending on art at a time when, it could be argued, inextricably-linked worldwide economies are poised for a painful contraction? In short, because in some quarters, art is seen not as a discretionary luxury, but instead as the store of value that it has always been, especially during economically trying times.  

 

A survey compiled by the U.K. research firm ArtTactic found that in the second half of 2007, 40% of respondents expected a correction in the art market. Given the market’s unprecedented climb over the past eleven years coupled with the steep decline in consumer confidence relative to the woes of the credit market, that result was not particularly surprising. However, what only a few have known for quite some time is that art has often been one of the most stable, not to mention profitable, investments during uncertain economic times. In fact, when the stock market took a swoon in 1987 and again in 2001, outperformance by the art market was notable.

Two NYU economists, Jianping Mei and Michael Moses, developed the Mei Moses All Art Index. The index analyzes the repeat sales of over 12,000 works of art at auction since 1950 to generate precise return data. The pair reported in an article in Forbes that “during the armed conflicts of lengthy duration of last century, art indexes outperformed major stock indexes.”  When stock markets fell during World Wars I and II, art outperformed the S&P during most of those years, and by 1920 had risen to 125% of its 1913 value (versus 94% for the market). Further, while the S&P 500 increased 67% during the Korean War (1949-1954), art was up 108%, and during the Vietnam War (1966 to 1975) when the S&P 500 fell 27%, art rose 256%. 

However, art’s outperformance of the equity markets is not confined to times of war, but surpasses the more traditional investment vehicles as well when the markets are roiled by a troubled economy, exactly the situation we find ourselves in today.   In an article in InvestmentU,  Mei/Moses analysis of data from the 27 recessions since 1875 reveals that art does quite well in tough economic times. Investors want and need to invest their money but when confronted with volatility-producing uncertainty, the foundation of the bellwethers becomes rocky, and investors turn to art. 

 

For example, in 2000, the U.S. economy was facing many of the same conditions as it does today: declining retail sales, reduced capital spending and tightening bank credit standards. The peak in the Dow Jones Industrial Average that occurred on March 10, 2000 was followed by a loss of almost $3 trillion in market value and an overall loss for the year above 10%. Results for art were much different however with the Mei/Moses Index gaining 16%.  In addition to its outperformance, art has a low correlation with the stock and bond markets which makes it an excellent way to diversify a portfolio, and reduce overall risk. Far from being a luxury, it can be argued that art is an essential component of any portfolio.  

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With the news that Sothebys had guaranteed 78% of the value of its November Contemporary art sale versus just 35% of the same sale last year, many art market observers opined that the auction house was in danger of getting caught up in the euphoria of recent sales results. It’s easy after all, even for experienced players in the art market, to assign an element of infinity to the ever-escalating auction prices.However, the fact that the smart money’s betting on a continuation of the market’s acceleration should come as no surprise. The auction players witness firsthand, in auction after auction, the frenzy of demand from new categories of collectors. Not only that , but at these auctions they are witness to multiple new auction records being established for artists from around the world. Not to mention the fact that these auction houses’ annual sales are now routinely surpassing their pre-sale estimates.The auctioneers’ optimism is being driven by a heretofore unseen broadening of their buyer base beyond the hedge fund players. Sotheybys pegs sixty percent of their buyers as new within the last ten years. With the expansion of the ranks of the newly wealthy in Russia, The Middle East and Asia, buyers from these parts of the world have become an increasing presence at auction. Rather than being limited to the financial markets, their buying is funded by diverse sources of wealth including shipping, telecommunications, oil and gas, and commodities. This new class of collectors is determined to build impressive collections of art from their home countries while making equally impressive investments.Art’s intrinsic value has, throughout history, made it a reliable store of value. With oil prices at an all time high, the exchange rate of the dollar at an all time low, additional cuts in the interest rate more likely than not, and inflation that no one talks about, the appeal of tangible, portable assets such as art is clear.There really is no question then about the advisability of higher guarantees as the confluence of the factors supporting this art market has never before been witnessed.

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