Markets Collapse into the Close
The Dow Jones Industrial Average fell 831 points today, or 3.15%. The stock market carnage was not limited to the Dow, as the NASDAQ fell 315 point or more than 4% – the largest point drop in 18 years – and the S&P 500 Index fell 95 points or 3.29%. When drops of this magnitude happen, people ask why and begin to seek safe havens like gold. As the equity markets continued to fall during the day, the price of gold rose.
Market observers will be keeping a close on the markets to determine if today’s price action was a bull market correction or beginning of bear market or worse.
Here are some of the factors concerning market participants:
The Federal Reserve has raised interest rates seven times since the election of Donald Trump in November of 2016. Yesterday, Dallas Federal Reserve President Robert Kaplan noted that he was comfortable with three more rate hikes through June 2019. Donald Trump has been warning all year that the Fed’s tightening policy threatens the economy recovery. Yesterday, the President reiterated that he was unhappy with the Fed’s interest rate policy.
After the September Federal Open Market Committee meeting, the Fed noted that it would continue its policy of raising interest rates gradually. While the U.S. economy is performing better than other major economies, it also has the highest interest rates and has removed monetary accommodation. In contrast, the central banks of Europe, Japan, England and China have highly accomodative monetary policies that including pumping liquidity into the markets and low, zero or negative interest rates.
There is always a lag between monetary policy and economic impact. Some market observers are concerned that the interest rate hikes of the past two years may soon slow the real estate, automobile and other interest rate sensitive markets.
Inflation concerns have remained relatively quiescent in recent years. With the U.S. economy firing up, some worry that the Fed’s seven rate hikes since 2016 may not be enough to ward off inflationary pressures. Today’s September Producer Price Index print of 0.2% did little to allay inflation fears.
Market observers note that many stocks in all indexes have very high historic price earnings ratios, or in some cases, no earnings at all. Given that valuations are already stretched the potential for further gains may encourage traders to pull money from stocks and seek the safety of gold or U.S. 10 or 30 year treasuries which are now yielding 3.2% and 3.4%, respectively. Some companies are also concerned that the trade war between the United States and China may be prolonged and impact earnings going forward. Lower earnings would mean higher price earnings ratios at current valuation making stocks seem expensive and risky.
Dow gold ratio
Traders following the dow/gold ratio will note that it has climbed to a multi year high of 22:1 up from 13:1 in early 2016.
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This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.