Shares of Sotheby’s (BID) are trading down 6% today after reporting earnings before the open. Even though the company exceeded analyst expectations by two cents, comments from CEO Tad Smith that art buyers are becoming “more discerning” has investors becoming more discerning towards the stock. Following today’s decline, the stock is down over 30% from its 52-week high back in February and more than 35% from its all-time high in 2014.
While Sotheby’s caters mostly to people who have too much money lying around that they feel the need to spend it on paintings and pricey tchotchkes, in the past the stock’s performance has been cited as a relatively good predictor of the business cycle. The chart below shows the performance of Sotheby’s stock since 1989 with recessions overlaid in gray. As shown, there have been three major peaks in Sotheby’s going back to 1989 where the stock lost more than two-thirds of its value, and all three of them preceded recessions. In early 2011, Sotheby’s share price was more than cut in half again, and while a recession didn’t follow here in the US, the European economy (where many of Sotheby’s buyers come from) did contract.
So, what is Sotheby’s telling us about the economy now? We’ll let you judge for yourself. Our two cents is that we don’t think a recession is anywhere on the immediate horizon, and shares of Sotheby’s are still down nowhere near as much as they were in the prior periods mentioned so it is not an equal comparison at this point. That being said, if spending at the top of the income ladder shows signs of slowing, we have to watch for any signs that it doesn’t spread down to lower rungs.