Looking Ahead (Fall 2011)

Will the Art Economy Continue to Be Immune?

Typically, writing our forecast is a routine endeavor, as we consider the previous season’s results as well as key factors that are likely to influence the market going forward. This time proved to be a less straightforward undertaking. The events of the summer made such projections unusually difficult, as all markets were increasingly volatile and uncertain, and are expected to remain so for some period to come.

What has worked in the art economy’s favor to date, both in terms of the rebound out of the 2008 downturn and the many record results in 2010 and 2011, has been the belief amongst the wealthy that art, and other tangible assets, are a reliable store of value when faith in global financial markets is fragile.

Additionally, to the extent that the US and European economies can be said to have recovered since the last downturn, it is predominately only the wealthy who have experienced it. The middle class, the core driver of the US economy, is still mired in what is effectively, though not technically, an ongoing recession. Add in the political and economic uncertainty in the EU, and the economic outlook for the second half of 2011 and early 2012 is not a promising one.

That being said, except in times of market dislocation such as the fall of 2008, the art economy is a lagging indicator into downturns by approximately six to nine months. Furthermore, a notable single-owner collection that presents a once- in-a-lifetime buying opportunity for passionate collectors can temporarily buck the trend, as seen in the Yves St. Laurent sale in February 2009. So, even if financial market turmoil continues this fall, sale results could still be strong if the auction houses have good and suitably-priced property. The upcoming auction of Elizabeth Taylor’s important jewelry, paintings and memorabilia at Christie’s is likely to create a well-publicized feeding frenzy which could go a long way in boosting the appearance of a robust and still-healthy art market in the latter half of 2011.

Nonetheless, we are left with a nagging concern, especially when we look back to the summer of 2007 when the debt markets seized up nearly overnight, signaling the beginning of the yearlong collapse that brought about the full crisis later in 2008. During that period, the art market seemed entirely unaffected and naysayers who warned of impending problems were shunted to the sidelines. Christie’s and Sotheby’s continued to take enormous risks on auction guarantees, ending disastrously in the fall of 2008. Since that time, both houses have adopted a welcome prudence and sobriety when it comes to risk, specifically auction guarantees, and we would expect, in times like these, they will continue to stick to it.

Now is an important time for all collectors and art businesses to keep a close eye on both their liquidity and exposure to value risk, and for auction houses to keep estimates low. To conclude that the art market is immune to broader economic uncertainty, based on the strong results of the first half of 2011, might be a repeat of a past mistake.

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