After last week’s rebound rally — driven by hopes of more cheap money stimulus from the likes of the Bank of Japan, the People’s Bank of China and the European Central Bank — stocks dropped Monday as crude oil fell and investors wondered if the Federal Reserve would stick to its forecast rate-hike schedule for 2016.
In the end, the Dow Jones Industrial Average dropped 1.3% to cross below 16,000, the S&P 500 dipped 1.6%, the Nasdaq Composite fell 1.6% and the Russell 2000 ended the day 2.3%.
Treasury bonds were stronger, the dollar lagged, gold gained 0.8% and oil lost 7.6% to close at $29.75 a barrel on comments from Saudi Aramco chairman Khalid Al-Falih that they are maintaining their investment plans — fueling further oversupply concerns.
The crude oil decline slammed energy stocks, pushing the group down to a loss of 4.5%. Twitter Inc (NYSE:TWTR) fell 4.6% after confirming a string of high profile executive departures that analysts wondered could make a turnaround more difficult. Stifel downgraded the stock as a result.
SanDisk Corporation (NASDAQ:SNDK) lost 8.4% after being downgraded by JPMorgan on weak earnings estimates.
Bank stocks were hit again, falling 3.5% as a group, on ongoing focus on the risk of a deterioration in energy loan asset quality as high-cost shale producers face bankruptcies and defaults. Regionals led the way down, with Fifth Third (NASDAQ:FITB) down 5.8% and Zions Bancorporation (NASDAQ:ZION) down 5.2%. Meanwhile, Bank of America Corp (NYSE:BAC) lost 4.4%.
Federal Reserve Board Chair Janet Yellen and her cohorts will convene for the first policy meeting of 2016 this week. No action is expected. Yet, the wording of the statement and how much focus is given to downside risks, will be closely monitored.
The stakes are high, as they’ve frequently been in this central bank dependent bull market, with stocks coming off of their worst start to a year ever. As in, it’s never been as bad as what we just lived through. Let that marinate in your mind for a minute. For the year, month, and quarter-to-date, the Dow is down 8.8%, the Nasdaq is down 9.8% and the Russell 2000 is down 12.2%.
Already, the futures market expects at most only a single quarter-point hike this year. To satisfy dovish expectations, the Fed will need to acknowledge in their policy statement the recent financial turmoil and downside risks to the inflation outlook. This is the mostly likely scenario, given the Fed’s repeated tendency to coddle markets whenever volatility rises.
Precious metals should be the big beneficiaries of this as well as mining stocks like Barrick Gold Corporation (NYSE:ABX), which is up 26% for Edge subscribers so far this month as shares exit a long consolidate range going back to August. Edge Pro subscribers are playing along with the Feb $105 calls on the Gold Trust SPDR (NYSEARA:GLD), which are up 28% since recommended on Jan. 15.
Failure to do so would likely push the Dow Jones below its 200-week moving average, a critical long-term support level, likely triggering the end of the post-2009 bull market.
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