Investors will be looking for some signs of stability the rest of the week as market declines and volatility have seen a sharp rise. The stock market had its worst Christmas Eve showing on record on Monday, with the Dow Jones Industrial Average dropping by almost 700 points. The declines put the benchmark S&P 500 within just a few points of bear market territory.
Monday’s sell-off came on the heels of what many consider to a bizarre and unexpected announcement by Treasury Secretary Steve Mnuchin. Mr. Mnuchin felt the need to reach out to the nation’s six largest banks while on vacation over the weekend and had conversations with each CEO regarding their respective bank’s capital position and liquidity.
The phone calls and subsequent announcement were done in an effort to calm the markets but clearly that plan backfired. The discussions of bank liquidity brought up concerns that were reminiscent of the 2008/2009 financial crisis, and investors are now wondering why Mnuchin felt the need to have these talks and why he felt he had to have them now.
Although markets have been under some significant pressure and volatility is clearly on the rise, there has not been any widespread concerns about liquidity or the health of the financial system in general. These actions over the weekend have raised some eyebrows, however, and investors are left wondering if there could be more negative news on the horizon.
The shakeup in the Trump administration has continued in recent weeks, with Secretary of Defense Jim Mattis and Chief of Staff John Kelly both deciding to exit the administration. These two men are considered to be a rational and calming influence in the administration and their absence is certain to raise some serious concerns about foreign policy and other issues.
The U.S. Government remains partially shutdown in the meantime as President Trump has stated that the shutdown will remain in effect until he gets the funds he has demanded to build a wall along the country’s border with Mexico. There have thus far not been any significant, tangible efforts to reopen the government and the current shutdown looks as if it will stretch into the New Year.
The bottom line is that there are numerous, serious issues at play that have the potential to fuel further risk aversion and massive declines in risk assets. The mix of geopolitical issues (both foreign and domestic), the trade war with China, a global economic slowdown and rising rates are all factoring into recent market behavior. The situation may get worse before it gets better, and the current asset rotation could continue in the weeks and months ahead.
The gold market is now trading at a 6-month high and appears poised for further upside. Although a pullback could be seen in the sessions ahead, such a pullback may be considered healthy after the market took out key resistance at the October highs around $1252. Stocks have gone from “buy the dips” to “sell the rips” while the gold market has now become a buyers’ market. This shift in market dynamics could keep a strong bid in the yellow metal and may very well lead to the next major cyclical bull market in gold as stocks enter what could be a deep and protracted bear market.