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Crescenzi: Art Market Shows Affects Of Bad Economy

Sotheby's held an art auction on Tuesday and the results were weak, with total sales of $125.1 million, which, according to the New York Times, was well below the low estimate of $202.4 million.

Only 68% of the art offered was sold, the lowest rate for any of Sotheby's multiple-owner evening auctions of contemporary work dating back to 1994, according to Bloomberg. The results reinforce the idea that asset prices across a broad spectrum of asset classes are falling, and that investors worldwide have become extraordinarily risk adverse.

Background on the Art Market as a Top-Down Indicator
Art is certainly more of a want than a need, which is why during different points along the economic cycle art demand fluctuates, just like as it does for anything else that depends upon the allocation of discretionary income. By tracking art prices, top-down investors can gain a better sense of the health of the economy both in the U.S., which has for many years dominated the art market.

The art market has also become an increasingly good gauge of economies abroad, particularly with respect to gauging the amount of excess capital that exists there and any irrational exuberance that might be developing as a result of prosperity from the global economic boom.

Art prices tend to rise at a pace similar to that of stock prices. Based on an index created by Mei and Moses for the period since way back in 1875 (the work by Mei and Moses is the most extensive around), art prices are shown to have returned 8.2% in the 50 years ended 2000 compared to a return of 8.9% for the S&P 500. Importantly, although art prices returned a similar amount as equities and tended to be more volatile during the period, the correlation between art prices and equities was small, less than 10%.

For example, during many of the worst periods for the equity market over the past 50 years, art prices held up relatively better, including in 1987 and after the bursting of the financial bubble in 2000. This means that art is an asset class with significant diversification benefits, a substantial reason to track and invest in the art market. This also is quite telling with respect to recent events, which are pulling prices lower for just about everything.

The above is one of the 40 indicators included in and adopted from my new book, Investing from the Top Down.

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Tony Crescenzi
Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."