Short or long? What perspective to take on the art market?

Julia Niżnik

Although the art market is considered one of the most independent economic environments, it is not completely isolated from the influence of external factors. Both market trends and macroeconomic factors affect it, for example, the general state of the economy, the prevailing business cycle, economic growth, the level of societal wealth, and income.

In short

Works of art are often subject to trends, the snowball effect, or so-called herd behavior, which often leads to the superstar effect. This means that certain artists or works are more popular than others, commanding high prices. As a result, price indices of various artistic categories and movements, as well as artists themselves, are dependent on market trends, albeit only in the short term. This can certainly contribute to higher investment returns, even in the short term. However, in the long term, one cannot predict the tastes and preferences. The correlation between stock market returns and price indices occurs in the short term, with a one-year lag. For example, significant growth in the capital market unlocks idle capital, influencing an increase in the flow of free funds, encouraging investment, which results in a dynamic increase in prices in the art market.

Long-Term Perspective

Tangible alternative investments are more stable against market fluctuations and inflation risks. The art market is characterized by a long-term time perspective. Positive cash flows are not typically generated until the moment of sale, although this doesn't necessarily have to be a rule in the case of artworks. There is the possibility of leasing works during their ownership period, for a fee or for free, which in the long term may also lead to an increase in the value of the work or a reduction in its maintenance costs.

In the long-term time horizon, societal wealth not only influences the volume of sales generated in the art market but may also be reflected in the characteristics of a given work. The period of economic recession in the Netherlands after the war with Spain had a significant impact on the art market because even wealthy people were forced to reduce their spending on art. In response to the prevailing situation, artists began creating smaller paintings with simplified themes and fewer colors. This allowed them to offer more affordable prices to buyers and stimulate demand. The increase in the average level of societal wealth worldwide over the past 50 years has also led to increased demand for art and an increase in the size of the market. An interesting observation is also the positive correlation between art prices and periods of growing household income inequality. Studies have shown that the greater these inequalities, the more price records are set in the auction market.

Short or long?

Art market price indices are characterized by low sensitivity to business cycle fluctuations. The art index clearly surged during periods of economic downturn in 2000-2001, 2007-2009, and during the COVID-19 pandemic. During economic downturns, there is a negative correlation between the art index and the stock index. Prices in the art market rise while significant declines are recorded in the stock market. This, in turn, provides the opportunity for safe investment in uncertain times, leading to increased demand during economic slowdowns. Investing in art is a complex process. Although it does not guarantee immediate profits, it has a low correlation with movements in financial markets and can yield stable profits in the longer term. Ultimately, the choice between short-term or long-term strategies depends on the individual goals and risk tolerance of the investor.

References:

Goetzmann, W. N., Renneboog, L., & Spaenjers, C. (2011). Art and money. American Economic Review, 101(3), 222-226.

Lucińska, A. (2021). Obrazy na rynku finansowym. Analiza efektywności inwestowania. Difin.

_{The content of this publication is for informational and educational purposes only. Before each investment, one should individually assess the benefits and risks associated with the planned transaction. Before making any decisions, consider (for example, with the assistance of a financial advisor) whether the transactions are suitable in light of the interested party's specific needs and financial situation, the adequacy of investing in any assets, or the application of any investment strategies. 
The information presented is based on the authors' current knowledge at the time of publication and may become outdated. It also does not constitute a guarantee that the art market will maintain its previous trends in the future. Trading in works of art is always associated with a series of risks that should be individually considered before making a transaction. No information contained in the publication constitutes investment advice or any opinion regarding the suitability of any securities, and the opinions expressed on this page should not be treated as advice regarding the purchase, sale, or possession of any securities. DESA Unicum and the author of the publication are not responsible for the decisions made by recipients of the published content, which always remain the individual choice of the parties involved in potential transactions. 
Investing always carries the risk of loss, and those interested in art market transactions should seek professional financial or legal advice.}