What would you bid for shares of Sotheby's (NYSE: BID)?
Not much, the market said through much of August. Shares of the world's biggest art auction house tumbled more than 25% in the first three weeks of August. That was fueled partly by comments that one-time corporate-raider-turned-art-dealer Asher Edelman made to Bloomberg about cash-pressed clients who wanted to dump some art cheap.
Shares have bounced back some but are still way off their April highs. In a nutshell, worries about Europe and the market have some convinced that sellers of toys for rich folks can't be in good shape. The evidence -- both macro and micro -- suggests that such fears are overblown.
First, the history of the art market says that it doesn't move in tandem with the stock market or even the economy. In a 2002 paper by New York University's Michael Moses and Jianping Mei, the authors reviewed more than 100 years of art sales by major auctioneers and found that art beats bonds, underperforms stocks, is less volatile, and has low correlation with other markets. To use a recent example, art prices rose in 2008 when the market was collapsing and dropped in 2009 as Wall Street began to take off again. So the ripples on Wall Street or in European markets don't matter much -- at least for now.
Second, the art market has been holding up pretty well. After their paper, Mei and Moses created what has become the art world's leading index to art prices. The Mei Moses All Art Index was up 5.4% in July, its most recent reading because the auction market virtually shuts down in August (they're a civilized bunch, you know). That's less than it was up earlier in the year, but still, black ink is black ink.
Third, while the fall auction season is still shaping up, the early signs are good. Every analyst who follows Sotheby's raised forecasts after second-quarter earnings, even as shares tumbled. The company's stock price is down to 12 times this year's earnings, from more than 20 in the spring. Closely held rival Christie's has the auction of Elizabeth Taylor's estate coming up, and Sotheby's is having a garage sale one can hardly imagine for Edmond Safra. Sellers seem to think conditions are OK.
Fourth, there aren't a lot of other good ways to bet on the art market if you're not a millionaire. There are a handful of art funds that sell shares in collections assembled by portfolio managers, but Reuters' Felix Salmon has dispatched the rationale for those funds better than I could, and saved me the work. Short version: The underlying assets are hopelessly illiquid. Skate's Art Market Research has a 14-stock art industry index, but Sotheby's is two-thirds of the total value of the group. Alternatives like Germany-based Artnet or Switzerland's MCH Group are small and volatile.
Fifth, and most important, Sotheby's client base is more insulated than almost anyone from a double-dip recession. The company simply doesn't rely on the general U.S. consumer the way most retailers do -- it's more analogous to a Tiffany (NYSE: TIF), which has gone from $43 to $70 in the past year. Even fellow auctioneer eBay (Nasdaq: EBAY), which once carried a "recession-proof" tag, is no longer immune.
It's not exactly news that income inequality is accelerating in the U.S., with rich consumers continuing to spend on luxury goods and Sotheby's and Christie's agreeing that Asia is generating a new class of serious collectors. May we all agree that La Liz's jewels qualify as luxury goods? Yes, if the economy tanks hard enough, for long enough, Sotheby's could take another dip. But it's smarter to bet on the business version of Wallis Simpson's maxim that you can't be too rich or too thin.
