Could the art market resist another crisis?

On 15 September 2008, just as Lehman Brothers was collapsing, Sotheby’s London sold more than $120 million dollars worth of Contemporary art works by Damien Hirst, generating three of his best five results to date.
On 15 September 2011, as central banks take joint action to maintain medium-term dollar liquidity in a concerted attempt to alleviate fears that have plunged financial markets into a downward spiral (the S&P 500 lost 14% from mid-July to the start of September), Christie’s New York sold ten works by Maqbool Fida HUSAIN for more than $4m generating 2 of his all-time best results. Could this be the sign of a market that has shed its speculative dimension, or of a market that has definitively moved to the East…or of a market that has simply become impermeable to changes in the global economic climate?

Of course, the fact that the art market didn’t seem particularly worried by the sub-prime crisis in September 2008 did not stop it suffering a very serious correction with the subsequent economic crisis. The S&P 500 fell by 45% in 6 months between September 2008 and March 2009, whereas art prices contracted by 34% over the same period.
In response, the central banks lowered interest rates and governments injected billions into the recapitalisation of banks in order to ensure the continuity of a faltering system. At the same time, the auction houses stopped their bad habits of offering guaranteed prices and deliberately thin catalogues to boost prices. Within a matter of months, global finance was back on an upward path (the S&P 500 gained 95% in 2 years) and art prices recovered back to their 2007 levels.

By the summer of 2011 global financial markets were facing another meltdown with a potential Greek default and the downgrade of US debt and the banking system’s instability has pulled economic growth outlooks back into the red.

In September 2008, the Art Market Confidence Index reflected a certain optimism in the economic outlook (50% of respondents expected an improvement in the economic situation over the following three months and 60% saw the economic situation as favourable) and the majority (2/3) were expecting an increase in art prices. This year, the AMCI has already lost 50% since mid-July, and the art market professionals are pessimistic about the current and the future situation.
Although purchase intentions remain high, respondents are cautious about the evolution of art prices in the medium term, and indeed are not expecting an increase over the coming months.
After a historic first semester, it would appear that the market’s professionals are better equipped and more lucid in the face of another crisis. The growing appeal of gold and other alternative investments as standard financial assets get caught in an ever-accelerating boom & bust cycle has the effect of restoring the attraction of art as a less volatile investment.

The 2008 crisis hit the art market instantaneously, belying long-standing theories about how financial and art markets are correlated but staggered. The market’s wait-and-see attitude in 2011 – after the difficult lesson of 2008 – allows it to be seen as a viable alternative to the different assets caught up in the negative maelstrom. New strategies implemented or being set up within the art market (online auctions, virtual art fairs, accelerated information diffusion, online connection of professionals around the world, opening of markets…) are tending to strengthen and facilitate investment in the art market, which is no longer reserved for “insiders”.

Whereas the price of gold has doubled in two years since the last crisis ended, the global art price index has risen just 40 points since March 2009.
The exceptional growth of the Asian art market and Asian marketplaces – generating global auction records almost every day – suggests that the upside potential in the global art market is still enormous.

This past week, the joint statement by the central banks has pacified financial markets and even bank stocks have started to recover. How long this will last is difficult to predict. The debt problem has not gone away, and while traditional growth and monetary policy levers have already attenuated the gravity of the situation, they have not solved it. While certain economists are predicting bankruptcy, the art market – after a historical first semester – is not paying much attention to the shaking foundations of the world’s financial institutions or the apocalyptic rumours in the street.