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Stock market freakout: Wall Street bets the boom may be over

Stock market freakout: Wall Street bets the boom may be over

Release Date:  Friday, November 23, 2018


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Gold and Silver Prices

Gold closed the week with its second consecutive weekly gain as the dollar slipped and investors look to less risky assets.

"Gold prices inched up on Friday... on safe-haven demand for the metal ahead of the Group of 20 (G20) summit next week where the leaders of the US and China are set to discuss their trade dispute. Spot gold was up 0.1% at $1,227.90/oz at 4.39am GMT. The metal was up about 0.5% after a 1% gain last week.

"President Xi Jinping is due to hold talks with US President Donald Trump at the G20 meeting that starts on November 30 in Argentina to reconcile their trade dispute.

"The US is set to raise its tariffs to 25% on $200bn of Chinese imports on January 1 from 10% currently. Trump has also threatened to impose tariffs on all Chinese imports unless US demands are addressed.

"'Investors are stepping in to hedge some of the possible tail risk from the G20 meeting next week,' said Stephen Innes, Asia-Pacific trading head at Oanda in Singapore, adding that the weaker dollar and US Federal Reserve's rate outlook are also supporting gold prices.

"The dollar declined as a potential global economic slowdown raised doubts about the pace of interest rate increases by the Fed next year. 'A good sizable portion of the investment community is looking to position long on gold and that has compounded with the fact that the Fed turned somewhat dovish,' Innes said." ("Gold benefits from safe-haven buying ahead of G20 meeting," Karen Rodriguez, Business Day, 11/23/18.)

Gold ended the week up $13.30, closing at $1,222.70. Silver ended the week up $0.11, closing at $14.26.

Stock market freakout: Wall Street bets the boom may be over - Egan

Market turmoil points to further declines while the outlook for the economy has darkened and recession may be on the way.

"Investors are increasingly betting that the rapid economic and profit growth of the past year is about to come to an abrupt end.

"That forecast prompted a freakout on Wall Street over the past two months. The Dow has shed nearly 2,500 points since early October as investors have come to grips with the gloomier outlook. Investors are fleeing former tech darlings like Apple (AAPL), Facebook (FB) and Amazon (AMZN), knocking the Nasdaq 15% below its all-time high.

"The turmoil has wiped out all of the market's gains for the year, a significant development following the extreme euphoria that took hold in late January.

"'We are beginning to get the scent of a possible slowdown,' Kristina Hooper, global market strategist at Invesco, wrote to clients on Monday.

"A wide variety of forces have combined to darken the outlook. Tariffs, freight costs and wage hikes are beginning to ding record-high corporate profits. The Federal Reserve's rate hikes are raising borrowing costs - and squeezing the credit-sensitive housing and auto markets. Investors fear the Fed will hike the United States into a recession.

"The corporate tax cuts enacted in late 2017 won't boost bottom lines next year any more than they did this year. Boom-to-bust oil prices have crashed into a bear market. Germany and Japan, the world's No. 3 and No. 4 economies, are already contracting. And China and the United States are in a chilling trade war.

"Taken together, the backdrop points to an end of the heady days of the past year.

"'We've already begun the next bear market,' said Cole Smead, managing director at Smead Capital, a Seattle investment firm...said that a 'light switch went off' at the end of August causing investors to rush out of the most expensive parts of the stock market.

"'Big cap tech and growth darlings are absolutely getting crushed,' he said.

Here comes the earnings slowdown

"But Kostin [David Kostin, chief US equities strategist at Goldman Sachs] urged clients to take caution by trimming stock holdings and lifting cash balances. The biggest headwind may be earnings, the central driver of stock prices. S&P 500 earnings per share will slow dramatically to 6% in 2019 and just 4% in 2020, Goldman Sachs predicts.

"That's quite the reversal from the breakneck pace of earnings growth in 2018, which is estimated at 23%.

Dow turns red for 2018

"Domestic economic growth may have also peaked. US GDP growth will decelerate from 4.2% in the second quarter of 2018 to 1.6% at the end of 2019, Goldman Sachs projects.

"Slowdown concerns have already caused economically sensitive stocks to tumble... Investors have fled the most expensive pocket of the market: former leaders like Netflix, Alphabet (GOOGL) and Nvidia (NVDA) are all down sharply from their highs.

Goldman: 43% chance of recession in three years

"While Goldman Sachs only sees a 10% chance of a recession in the next year, the probability rises to 43% within three years... The firm said that suggests the next US recession will begin in the second half of 2020, echoing what Moody's Analytics economist Mark Zandi recently predicted.

But the Fed's rate hikes are already having an impact on the frontline of the real economy: the housing market. Sales have slowed down in recent months as homebuyers adjust to the seven-year high in mortgage rates, changes to the tax law and affordability issues. Homebuilder stocks are in a bear market.

Will the Fed come the rescue?

"... the inability of the housing market to absorb rate hikes could be a canary in the coal mine for the broader economy. "Invesco's Hooper believes the Fed, responding to the looming economic slowdown and trade wars, 'is likely to take its foot off the accelerator' in 2019. Goldman Sachs, on the other hand, thinks warming inflation will cause the Fed to hike five more times by the end of 2019.

"Michael Wilson, equity strategist at Morgan Stanley, similarly told clients on Monday that Fed officials aren't likely to come to the rescue because they're 'simply doing their jobs.'

"'We are not expecting the Fed to bail out equity market participants,' Wilson wrote." ("Stock market freakout: Wall Street bets the boom may be over," Matt Egan, CNN, 11/20/18.)

Gold firms as stocks slide, hold narrow range - Reuters

Gold remains a traditional safe haven in times of economic and political uncertainty.

"Gold firmed near a two-week peak on Tuesday, as a slide in stock markets offset an uptick in the dollar, with the metal holding a tight range in light trade ahead of the U.S. Thanksgiving holiday.

"Spot gold dropped 0.28 percent to $1,220.56 per ounce, having earlier hit its highest since Nov. 8 at $1,226.56.
"'(Trade) is relatively sideways at the moment... gold does not have its own momentum behind it, it is simply responding to external forces rather than any energy and vigour of its own,' said Ross Norman, chief executive officer of Sharps Pixley.

"'We see gold trading in a $1,215-$1,240 range for the remainder of the year.'

"The Fed has raised rates three times this year, making it more expensive to hold non-interest-bearing gold. While a fourth rate hike is expected next month and three more next year, a strong majority of economists polled by Reuters say the risk is that the Fed will slow that pace down.

"'The Feds have changed the landscape to a more dovish terrain suggesting that they too are turning a little bit risk-averse,' Stephen Innes, APAC trading head at OANDA in Singapore, said in a note.

"A downtrend in global stocks over the past two months triggered limited flows into bullion, a traditional safe store of value in times of economic or political uncertainty, but gains were held in check as investors also preferred the safety of the dollar.

"'Trade tensions remain heightened between the U.S. and China, global equities are under pressure, while Brexit negotiations continue to create uncertainty across markets, keeping gold's safe-haven status intact,' traders at MKS PAMP said in a note.

"Investors are now keeping a close eye on a G20 summit in Argentina scheduled for later this month, when U.S. President Donald Trump is expected to meet Chinese President Xi Jinping to discuss their trade dispute.

"While both leaders expressed optimism about resolving their respective issues ahead of the meeting, a top Chinese diplomat in veiled criticism of Washington said on Monday that the APEC summit's failure to agree on a communique resulted from certain countries 'excusing' protectionism." ("Gold firms as stocks slide, holds narrow range," Reuters, CNBC, 11/20/18.)

Recession Could Hit a Vulnerable U.S. Economy in 2019- What Investors Should Do - Sonenshine

A vulnerable economy and the Fed moving fast should make investors defensive.

"The U.S. economic outlook is getting bleaker. 

"As experts of financial markets and the economy debate whether there will be a recession next year or later, the chances of that one will come eventually are certain. A recession is defined as two consecutive quarters of negative GDP growth. 
"'Certainly, there's growing risk of recession - 2019, 2020, going forward,' Chief Economist at LendingTree, Tendayi Kapfidze told TheStreet.

"'I think by this time next year, we'll be looking in our rear view mirrors,' said Danielle DiMartino, a former policy adviser to the Dallas Fed, referring to the fact that there may not be much expansion left in the economy. DiMartino is also the author of 'Fed Up: An Insiders Take on Why the Federal Reserve Is Bad For America.' 

"The current streak of rising GDP is now almost ten years, almost equaling the longest U.S. expansion on record, which came between 1991 and 2001. Looking ahead, the economy seems due for some choppy waters. 

Economy Is Particularly Vulnerable

"The economy's slow recovery from the Great Recession is making it particularly vulnerable to a recession. U.S. GDP grew by more than 4% in the second quarter of 2018, far less than the 7.26% growth it reached in 1984, according to World Bank data. GDP growth hovered around 1% and 2.8% between 2010 and 2017 as the economy recovered from the recession, which hit in 2009 and lasted for three quarters.

"The current slow growth rate means that any external shock to the economy, like the housing bubble in 2008, could put it right into a recession. 'If the economy is running at a slower pace, and you get an external shock, you're at more risk of dipping into negative growth,' Kapfidze said.

"The slow growth is not expected by many to pick up much in 2018.

"'Our US economists expect US GDP growth will gradually decelerate from a peak of 4.2% in 2Q 2018 to 1.6% in 4Q 2019 and 1.5% in 4Q 2020,' a team of Goldman Sachs strategists wrote in a note out Monday... weakening growth would make the economy even more vulnerable than it already is to an external shock, according to Kapfidze's logic. 

"And some are concerned about excesses in financial markets, which has the potential to create that shock. 'You worry about investment activity that's being funded by too much debt, and the risk that you have a build-up of imbalances,' Barclays Chief Economist Michael Gapen told TheStreet a week ago.

"He mentioned potential excesses in commercial real estate. Meanwhile, margin debt - debt used by investors to buy stock - is currently near its record level... 'Margin debt is very high,' Ming Cen, managing director and senior researcher at Perella Weinberg Global Macro Fund told told TheStreet. Margin debt is currently 2.1% of the total stock market, far above its historical average dating back to 1970, according to NYSE data. Margin debt never hit as high as 2% of the total stock market between 1970 and 2006.  

Is the Fed Moving Too Fast?

"If the Federal Reserve is raising rates too quickly, that could choke off growth in 2019. The Fed will almost certainly hike rates in December, and has signaled a strong preference to do so several more times in 2019. Now, Federal Reserve officials are divided on the number of rate hikes the economy will need in 2019. There could be as few as two and as many as four. But DiMartino pointed out that falling oil prices is one factor that should give the Fed reason for pause... House prices and prices of housing related goods are also falling. 'We saw furniture sales get hit - that's housing starting to bleed through into other areas of the economy,' DiMartino added.

"She also noted some investment grade bonds have sold off, signaling fears of worsening corporate credit. 'Pay attention to credit market volatility,' DiMartino said.

"'I don't see the United States exiting {2019 with strength},' she added. 'A year from now I don't see us having a discussion about a continued expansion.'

Investors Should Be Defensive 

"'Lightening up on equity exposure if you're overweight equities' would be a solid move, Mike Loewengart, vice president of investment strategy at E*Trade told TheStreet...  provide some balance in your portfolio," he added.

"Getting out of sectors that perform well in a booming economy would also be a smart move, Goldman [Goldman Sachs] said..." ("Recession Could Hit a Vulnerable U.S. Economy in 2019- What Investors Should Do," Jacob Sonenshine, TheStreet, 11/21/18.)

Classic bear market gold trade could be back from the dead with stocks in correction - Schnitzel

Gold prices could again surpass $1,300 due to a weaker dollar, volatility in stocks and possible inflation.

"Gold, the classic bear-market investment, has been ignored by investors this year, and for good reason: Gold prices have gone in the wrong direction, losing about $100 in the price per ounce since January... But as more investors fear that the end of the bull market in stocks is near and volatility in stocks continues, gold may get some attention.

"'A lot of the factors that led to gold seeing little interest from investors are going to be reversing,' said Bart Melek, director and head of commodity strategy at TD Securities.

"He expects a steady upward trend for the spot price of gold as central banks pump the break on quantitative easing and tighten monetary policy. He pointed to several other factors: Equities are not necessarily going to be the one-way bet (up) they have been for most of the decade-long bull market run, as volatility is back in a major way and many investors expect it to continue, or even increase. Another factor working against gold, the strong dollar, should start to reverse, Melek said. 'We think gold will be over $1,300 an ounce by the final months of 2019,' he said.

"Gold was trading above $1,220 per ounce on Wednesday. It began 2018 at a level above $1,300 per ounce. Gold prices have fallen roughly 10 percent since peaking in April as issues including the trade war with China, Fed interest-rate policy and a slowdown in overseas markets sent the U.S. dollar higher. The dollar hit a 17-month high versus other currencies last week.

"George Milling-Stanley, vice president and head of gold strategy at State Street Global Advisors, said his firm's SPDR Gold Trust (GLD) exchange-traded fund saw increasing interest from investors in October due to rising market volatility, with $472.3 million in inflows for the calendar month. The weakness in gold prices came after a summer of 'exceptional strength in the equity markets,' he said. (The third quarter was a period of record-low volatility in stocks, with no trading session where the U.S. market moved by 1 percent up or down.)

"Gold opened at $1,303.45 on Jan. 2., but a perfect storm of signals from the Federal Reserve and currency moves came together to drive gold down to a yearly low of $1,160.39 on Aug. 18. 'After Powell came in, [the Fed] started to talk about a persistent cycle of tightening in the U.S.,' Melek said. 'With employment and inflation at multidecade lows, the Fed began to raise interest rates, with two-year Treasury yields moving from 1.89 percent on Jan. 2 to 2.97 percent by Nov. 8.'

"The Fed is approaching the end of its tightening cycle, and with stocks plunging, expectations for further rate increases from the market have come down. Other central banks, including in the EU, are starting to remove monetary accommodation and tightening their policies, Melek said, and these decisions could result in a weakening dollar.

"You had interest rates move higher, which worked against gold, and at the same time, that drove the dollar higher," Melek said. As the U.S. dollar strengthened, highly indebted emerging markets countries had to repay loans in U.S. dollars. Instead of using resources to purchase gold, these emerging market countries, which are usually big buyers of gold, were forced to use those resources to repay loans, Melek said.

"Milling-Stanley also sees the dollar headwind easing. 'The dollar is looking a bit wobbly and so are equities, so the things that have been against gold for the past few months are turning,' he said. 'I think the broad trend in equities will be flat to downward with occasional rallies, and I think gold will benefit from that as it has so often in the past,' he said.

India and China remain huge drivers of gold prices

"Milling-Stanley said the price of gold could also now see support from a non-market factor: consumer buying, especially in emerging markets, which account for 50 percent of annual consumption. It is the seasonal period of strongest gold demand.

"There is generally an uptick in demand for gold during Diwali, the Hindu festival of lights, and is followed by the Indian wedding season, which runs from November until late May/early June. Milling-Stanley also noted that Christmas and Valentine's Day are other times when there is a stronger than usual demand for gold.

"China, a large gold buyer, has suffered economically from President Donald Trump's tariffs, and this in turn hurt Chinese industries. Currencies, including the Chinese yuan renminbi, all suffered, making gold more expensive for Chinese businesses and for emerging markets whose currencies were all driven lower, in part, by the rise of the dollar.

"'China also decided to deleverage, and part of that was restricting people who were not members of the Shanghai Exchange from leasing gold,' Melek said. 'This reduced the amount of physical gold in China by as much as 60 percent. Higher interest-rate expectations triggered a stronger dollar and, combined with emerging markets issues, drove gold prices lower.'

"Douglas Boneparth, president at Bone Fide Wealth and a member of CNBC's Financial Advisor Council, said investors can allocate a small percentage of their overall portfolio to gold... 3 percent to 5 percent of a well-diversified portfolio..." ("Classic bear market gold trade could be back from the dead with stocks in correction," Mike Schnitzel, CNBC, 11/21/18.)