The last two weeks you have seen a massive spike in U.S. stocks’ volatility as markets suffered a severe pullback. It finally surpassed correction territory last week. There are several reasons for this market route that has investors on edge. Inflation has returned to the U.S. once again and interest rates on Treasuries have been spiking to dangerous levels.
It is a reminder of why you need to have gold in your retirement portfolio. Stocks and bonds rise and fall at the whims of the markets. Economic downturns threaten to derail them every few years. Gold is the ultimate store of value throughout history. You need to know what gold goes in an IRA as well as IRA rollover rules and regulations.
What Happened to the Stock Market?
It only took a few days of significant declines for the stock market to drop more than 10 percent. On one day alone, the Dow Jones Industrial Average index declined more than 1,000 points. By Thursday, February 8th, the S&P 500 had officially reached the correction levels at off over 10 percent from the peak (and record) it had achieved near the end of January.
There have been several other multi hundred points declines since then. The markets have also had days when they recovered. Yet all in all the major averages are significantly down from the highs they were setting only last month. The reasons for these major declines include a return of inflation and rising interest rates.
The Return of Inflation Spooked Investors
It was a U.S. jobs and labor market report that first instigated the major falls on Wall Street. The report actually contained good news. It revealed that unemployment was at a low 4.1 percent. The average hourly earnings component also rose. This growth in U.S. wages by 2.9 percent for January turned out to be higher than economists had forecast at 2.6 percent.
These numbers raised concerns that inflation would rise because of wage pressures. Added to this was a report showing a third month in a row where consumer prices in the U.S. rose steadily. For three of the last four months, consumer prices increased by more than the two percent target that the Federal Reserve seeks to maintain.
Between the two numbers, economists and investors became spooked that inflation is on track to exceed the 2018 expectations. This chart shows how inflation is beginning to rise:
Higher inflation argues for faster interest rate tightening by Jerome Powell and the Federal Reserve. If the hawks prevail, there could be more than the three additional interest rate increases in the cards that the market has been looking for this year.
Rising Treasury Interest Rates Crushed Stocks
Inflation fears were only stoked by the alarming rise in the 10 year Treasuries interest rates. Investors have watched with mounting concern as interest rates in 10 year Treasuries rose to near three percent. By the time they touched a multi-year high of 2.89 percent, market participants became convinced that the era of cheap money really was over.
It is this cheap money that has fueled the rapid rise in stocks since the Global Financial Crisis of 2008. Central banks doled out enormous quantities of money to U.S. and worldwide markets for incredibly low interest rates. In Europe, these rates even fell below zero for a time.
Yet as investors have nervously watched the growing bond yields in the United States, they have suddenly become aware that this could motivate the Federal Reserve to pull the stimulus from the financial system faster than it had been planning. Stimulus including several rounds of quantitative easing has been poured into the economy ever since Lehman Brothers spectacularly collapsed back during September of 2008. After a decade of it, markets and investors have become addicted to the stimulus as a critical support for rising indices around the world.
Bond Markets Were Also Impacted
The plunge in global equity markets spilled over into options and other asset classes as well. During the stock market drops of the last few weeks, the volatility index (called the VIX or fear gauge) experienced its highest one day percentage change in its history. Besides stocks swinging wildly, currencies and bonds have experienced volatile moves.
Bonds are typically the place where investors scared by the equities markets go to hide. Yet the major fund managers slashed their allocations in bonds to a 20 year low as their worries increased that it is the bond market that represents the greatest danger for financial markets. The February Fund Manager Survey by Bank of America Merrill Lynch showed that fully 60 percent of the professional investors believe that troubles rumbling in the bond markets are the greatest threat to cause a “cross-asset crash.”
Over 196 individuals who mange a combined $575 billion in assets participated. Investors who responded to the survey claimed that they have lowered their bond exposure to 69 percent net underweight. It represents the low for the survey that started two decades earlier. Chief Investment Strategist Michael Hartnett from Bank of America Merrill Lynch explained:
“While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip.”
The fears that the bond market might plunge did not chase investors to stocks either. The equities allocation from the survey declined to 43 percent net overweight. This amounted to a 12 percentage point decrease. It represented the largest such decline in over two years. Merrill’s “Bull and Bear” indicator showed a signal to sell stocks late in January. That prescient sell signal remains in place according to Hartnett.
Bond Yield Rally During Stock Drop A Worrying Sign
It may be too early to call the recent stock and bond market correction over. Chief Economist and Strategist David Rosenberg of Gluskin Sheff and Associates warned about an overlooked characteristic of this stock market pullback. He revealed that the yields on the 10 year Treasuries actually increased by 16 basis points as stocks were plunging.
Unfortunately, Rosenberg points out that bonds very rarely rally when stocks fall. They did during Black Monday of 1987 and the Global Financial Crisis of 2008 (along with other significant corrections) though. Rosenberg sounded the alarm about a potentially greater sell off to come with:
“I cannot tell you how rare a market condition this is — that yields are rising into this risk pullback. But not this time. This rare occurrence of bond yields rising even as stock markets decline was a feature in 1987 and 1994. What these periods had in common was Fed tightening concerns, jitters over economic overheating, and an ever flatter yield curve. One of these years [Black Monday] had a huge correction and one had massive volatility and rolling corrections. Pick your poison.”
The eerie similarity of this month’s market drop and Black Monday is even more worrisome than the connection with the Global Financial Crisis plunge. The stock market crash of October 19th, 1987 witnessed the Dow Jones average crashing by a staggering 23 percent in a single day.
Gold Is Your Best Portfolio Hedge
The unfolding stock market volatility and significant declines could very well not be over as Hartnett and Rosenberg have both pointed out. This is a good reason for why to invest in gold with your portfolio. Gold has thousands of years of track record in protecting from market crashes. You should look into storage for a Gold IRA now while a relative calm prevails in markets. Here is how to invest in gold.