The Art Market is Not Immune - artmarketblog.com

There are lots of things that bother me about the way that art investment and the art market are portrayed. One of the things that bothers me quite a bit is the frequency of which the art market is referred to as being immune to economic or financial turmoil. To say that the art market is immune to the economy or financial turmoil is not entirely untrue depending on how you interpret the statement or the situation in which the statement is made, however, it is definitely not the whole truth and is often a misleading statement. The art market is a very unique market that reacts to certain events and factors in a way that does not correlate with the way most other investment markets would react. Because of this, the potential for people to incorrectly identify or mistake certain market movements, events or characteristics as evidence that the art market is totally immune to these events is quite high. This is not to say that there are not situations where the art market does display immunity but it is not usually to anywhere near the extent that is many people believe. There also seems to be many people who presume that because one particular artist, artwork, movement or regional art market appears immune to an economic downturn or financial crisis that the whole art market is immune.
As much as I want to advocate art as an investment and the art market I don’t see how misrepresenting the art market and art investment can be a positive move which is why I want to set the record straight. It is virtually impossible for the whole art market to be immune to a financial crisis such as the one we are experiencing at the moment because the crisis is having an effect on so many people and so many of the other investment markets that it is going to have to filter through to the art market at some point. The art market is often referred to as an isolated market which basically means that it has limited connections with other investment markets or, in technical jargon, it has a low correlation with other assets. As a result, the art market is said to not feel the effects of negative movements in other markets to the same extent as markets that have a much stronger connection with the market experiencing the negative movements. Once again, it is virtually impossible for the global art market to not be effected by the fluctuations experienced by other markets as there is always going to be some sort of a connection. The art market does, however, often have a less severe reaction to the movements of other markets and can even have a totally opposite reaction or not react at all. Therefore, it is reasonable to say that the art market has a low correlation with other assets because a low correlation does not mean that that there is no connection between the art market and other markets just that the relationship is not as strong as relationships between other asset classes.
Although the global art market is often incorrectly referred to as being immune to economic and financial turmoil there are certain circumstances under which the art market can exhibit characteristics that would suggest that it is immune to negative economic and financial market movements. There are also situations where the art market could genuinely be referred to as being immune. Because the art market is relatively illiquid compared to other asset classes there is usually not enough time for the art market to react to short term fluctuations in markets such as the highly liquid stock market where trading can take a matter of seconds. The art market can also take much longer to react to more severe and wide ranging financial and economic downturns such as the one we are experiencing at the moment which can trick people into thinking that it won’t react at all.
It is also important to recognise the fact that the art markets of different countries often have a low correlation with each other which means that even though the art market of one country may have been affected by a certain economic or financial event that the art market of another country may exhibit a very minor reaction or may not react at all. For example, at the moment the art market in Dubai and neighbouring areas appears to be have been affected very little by the current financial crisis where plenty of money appears to still be available for the purchase of art. It is also possible for particular movements or types of art to react differently than other movements or types of art. Contemporary art has benefited the most from the recent art market boom and as such has also been the most affected by the current financial crisis. Because speculation is far less common when it comes to the market for old master paintings and the value of old master paintings is much more verifiable and justifiable the market tends to be far more stable and less volatile. Although the market for old masters is not immune to market downturns they are often used as a hedge because they react far less to economic downturns than other sectors of the art market and other asset classes. Once again certain painters or certain artists whose work falls under the category of “old master” may exhibit characteristics that suggest that they are immune to economic downturns but a few examples cannot be used as a representation of the whole market for old master paintings.
In summary, suggesting that the global art market is immune to financial crises and economic turmoil is generally incorrect and misleading. There are certain circumstances and situations where a particular country’s art market or a certain sector of the art market could be considered to be exhibiting immunity to certain investment market related events. Just don’t be fooled into believing that an investment in art is a total and infallible hedge against an economic downturn.