Fine Wine Prices in ‘Optimism’ Phase of Market Cycle

by Vinovest Council

How Did Fine Wine Get Here?

Fine wine dramatically outperformed other assets in 2022.

While equity, bond, and cryptocurrency markets endured heavy losses, fine wine remained resilient. Fine wine did not crater to disruptions like inflation or geopolitical tensions that led to volatility elsewhere.

That white-hot growth was not sustainable and began to dissipate at year’s end. As Charles Antin, an auctioneer and head of wine auction sales at Zachys, put it, “We’re still setting world records for certain wines, but the graph can’t go up as steeply as it has, forever. My prediction is a cooling off, not a falling, but continuing to rise in the long run.”

Antin was right. Even though fine wine has a low correlation with traditional markets, a combined of factors caused prices to fall, including:

High cost-of-living
High inflation
High interest rates
Reduced demand in Asia
Foreign exchange fluctuations

But how much did these factors impact the wine market? To understand that, we need to examine the current cycle.

The Wine Market Moves in Cycles

Like any asset market, fine wine moves in cycles or long periods of gains followed by short pullbacks. Cycles are a part of any normal and healthy market. Since 2004, fine wine has experienced five price correction cycles.

These corrections come in two flavors:

Minor Corrections: a market decline around 8% to 12%
Bear Markets: a prolonged drop in wine prices of 20% or more

These minor corrections saw an average dip in wine prices of -10.0% and an average length of 0.9 years (11 months). The current correction has produced a -12.6% decline over the last year. If this correction resembles previous ones, we can expect prices to be close to the bottom.

But what about bear markets? Fine wine - more specifically, the Liv-ex Fine Wine 1000 - hasn’t experienced a decline of more than 20% since 2004.

Let’s put that in perspective. The S&P 500 has seen eight double-digit declines since 2004 compared to the wine market’s five. That includes three instances where the S&P 500 fell more than -20%.

While stock market corrections are shorter (averaging 157 days), they’re often more frequent and severe than those in the wine market.

What Kind of Cycle Are We In?

This is the million-dollar question. After all, a minor correction would mean wine prices are near their bottom and poised to rebound. A bear market would mean that wine prices have further to fall.

Two factors suggest that this cycle is only a minor correction.

1. No Major Market Shocks

Fine wine’s liquidity may be down this year. However, we have not seen a seismic financial collapse (re: the Great Recession) or a market dislocation (re: the post-Chinese Bordeaux bubble) necessary to produce a bear market. There are no current events that would suggest a major shock to the market.

2. No Overvaluation Before Cycle

The most important difference between a minor correction and a bear market is what happens before it starts.

Let’s look at the performance of the fine wine in the three years leading up to the correction.

The average return in the three years before the correction is 45.49%. The current market cycle fits this trajectory. With 38.41% growth since 2020, it falls in line with performances preceding the 2018 and 2011 peaks. This cycle is also less pronounced than the lead-in to the 2008 peak.

If fine wine were to enter a bear market, we would expect to see severe overvaluation of top wines. Put another way, prices would have climbed so steeply that a more dramatic correction would be in order.

The absence of skyrocketing prices suggests that this current pullback will be a minor correction.

Current Wine Market Outlook

If the wine market is indeed experiencing a minor correction, then wine prices should be close to their lows for this cycle.

While we do not recommend timing the market, we do believe market conditions favor buyers. History indicates that wine prices are likely to rebound, and the long-term trend of price growth will remain intact. Even if wine prices dip for another few months, data suggests that a financial turnaround is near.