U.S. equities moved lower again on Thursday — with crude oil collapsing to 2003 levels and gold enjoying its best day since November 2008 — as investors lose faith in the ability of the Federal Reserve to come to their rescue. And with it goes the narrative that drove this bull market higher as “home prices will never go down” and “dot-com can’t lose” drove the last two bull markets.
Another last-minute OPEC production cut rumor trimmed losses into the closing bell — a typical pattern, but one that couldn’t hide the extent of the damage.
In the end, the Dow Jones Industrial Average lost 1.6%, the S&P 500 lost 1.2%, the Nasdaq Composite lost 0.4% and the Russell 2000 lost 1%. Treasury bonds were stronger, the dollar weakened, gold surged 4.4% and crude oil lost 0.8% to close at $27.24 (recovering from deeper intra-day losses) as inventory “tank tops” concerns linger.
Gold’s rise now totals nearly 18% so far this year as investors seek a safe haven. The physical market looks primed for a supply crunch as vault reserves dwindle relative to outstanding futures contracts and the increasing attention on the consequences of a rush towards negative interest rates.
That’s boosted the February $105 Gold Trust SPDR (NYSEARCA:GLD) calls recommended to Edge Pro subscribers to a gain of more than 740%. Edge subscribers are enjoying a 31% month-to-date gain on a handful of gold and silver stocks including near 60% gains in Kinross Gold (NYSE:KGC) and Barrick Gold (NYSE:ABX).
All major sectors moved lower, with financials the laggards, down nearly 3% as a group. Weak results from Societe Generale in Europe kept the focus on the downward spiral connection between weak banks, weak sovereign bonds, and negative interest rates. Adding to the pressure was news the Riksbank (Swedish National Bank) cut its policy rate to -0.5% while signaling further cuts would be forthcoming if necessary.
Boeing Co (NYSE:BA) lost 6.8% after Bloomberg reported the SEC is investigating the company’s accounting of Dreamliner and 747 sales. Twitter Inc (NYSE:TWTR) lost 4.5% after issuing weak revenue guidance and disappointing user metrics. Tesla Motors Inc (NASDAQ:TSLA) gained 4.7% on vehicle deliveries and rollout timing of the Model 3.
It’s do or die time for the bulls. The S&P 500 is dangerously close to falling through the 1,800 level — its 200-week moving average — for the first time since 2011 in what looks like the end of an epic, three-year topping pattern.
There are many wrinkles to the story, from Eurozone “CoCo” bonds to Chinese dollar-denominated debts and the underwhelming reaction to negative interest rates from the Japanese. But at the core, this is about the Fed waiting too long to raise rates, allowing imbalances and excesses to accumulate, and then sticking to its guns after raising rates in December for the first time since 2006.
The turmoil unleashed in the wake of this decision has forced the Bank of Japan, the European Central Bank and others to cut rates deeper into negative territory, revealing that monetary policy has reached its limit. Negative rates are doing more harm than good, pressuring bank earnings.
The big winner in all this has been gold and silver, forlorn since inflation peaked in 2011 but getting a big lift now as it becomes increasingly clear the Federal Reserve’s decision to raise rates in December was a policy mistake. The futures market isn’t pricing in another rate hike until 2018 (!) while the Fed is still official maintaining a four-quarter-point-hike forecast for 2016. Most Wall Street analysts are looking for another hike in June.
As a sign of just how large the disconnect has become, consider that the futures market currently puts a higher probability on a Fed rate cut into 2017 than another rate hike according to Bloomberg data.
The Fed will likely be forced — both by a softening of non-jobs economic data as well as market volatility — to walk back this rate hike forecast, boosting gold and silver as the dollar weakens and future inflation expectations rebound. Traders aren’t waiting, but have already aggressively bid up the metals and the related mining stocks in anticipation of this.
So far, in her semiannual testimony to Congress this week, Fed chairman Janet Yellen gave traders the cold shoulder by focusing on recent job market gains and saying she was surprised that other central banks had taken rates as far into negative territory as they have.
These hawkish noises from Yellen are like ice picks to the hearts of the stimulus junkies on Wall Street. I expect them to continue smashing stocks lower to get her attention.
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.
