Wall Street Navigates Volatility as Rate Hike Nears

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The calm investors enjoyed recently shattered on Thursday, as stocks suffered their worst one-day loss in six weeks. The recent rout puts Wall Street’s four-month rally off of the August lows in jeopardy, as doubts grow over the fallout from the Federal Reserve likely hiking rates in December.

Anti-austerity rumblings in the Eurozone are a fresh wrinkle in the markets, as leftists take power in Portugal while Greek citizens once again fill the streets in protest of strict bailout terms.

In the end, the Dow Jones Industrial Average lost 1.4%, the S&P 500 dipped 1.4%, the Nasdaq Composite dropped 1.2% and the Russell 2000 ended 2% lower. The dollar weakened, gold lost 0.4%, crude oil lost 3.1% and copper extended its recent decline to fall another 2.1%, hitting fresh six-year lows.

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Crude oil closed at $41.61 a barrel on inventory concerns after the Department of Energy reported stockpiles increased for the seventh straight week — up 4.2 million barrels vs. the consensus estimate for an increase in the 0.8 to 1.1 million range. Production is also on the rise.

No surprise then that energy stocks weighed on stocks, down 2.4%, followed by a lagging materials sector, down 2.1%. Steelmakers were hard hit by disappointing economic data out of China this week, with ArcelorMittal SA (ADR) (NYSE:MT) down 8.3%, Cliffs Natural Resources Inc (NYSE:CLF) down 7.1% and United States Steel Corporation (NYSE:X) down 4.4%.

There have been a few pockets of strength in the retail sector, with hopes high heading into the critical holiday shopping season. While the Retail SPDR (XRT) lost 1.3%, Kohl’s (KSS) gained 6.1% on a third-quarter earnings beat of around 4% on better-than-expect comp-store sales growth.

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Biotech stocks had a wild ride, with the Biotech iShares ETF (NASDAQ:IBB) losing as much as 6.4% in intraday trading before trimming the loss to a 2.1% decline. MannKind Corporation (NASDAQ:MNKD) gained nearly 19% after confirming the placement of 50 million shares with private investment funds in Israel.

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The chart above shows the heart of the problem: A meltdown is underway in high-yield corporate bonds and commodities. Stocks have done their best to ignore the warning signs since early October. But the bulls are being forced to acknowledge that a December rate hike will have a number of ramifications for corporate earnings growth.

Most of them aren’t good.

For one, further strengthening of the U.S. dollar will weigh further on commodity prices, all the while lowering the value of repatriated foreign earnings.

Secondly, higher credit costs will not only raise default risks, and thus junk bond spreads, but will also slam the brakes on the flow of debt-funded corporate stock buybacks that have played such a big role in this bull market. According to Yardeni Research, S&P 500 companies have spent $2.5 trillion on their own shares between Q1 2009 and Q2 2015.

Lastly, all of this could result in renewed pressure on emerging market economies like Brazil.

As a result, investors are piling into defensive assets such as volatility. The VelocityShares 2x VIX (NASDAQ:TVIX) position recommended to Edge subscribers last week has already climbed nearly 25%, while the November $19 Short-Term VIX (NYSEARCA:VXX) call options recommended to Edge Pro subscribers are up 136%.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/dow-jones-europe-fed-rate-hike/.

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