U.S. Stock Market Takes Breather From Yesterday’s Carnage

Gold prices end slightly lower on stronger U.S. dollar, equities rebound. U.S. stocks rebound after heavy sell-off. Gold last traded at $1,251 an ounce. Silver at $19.42 an ounce.

The turmoil in global stock markets persisted overnight, with bourses in China, Japan, Germany and the United Kingdom all sharply lower. For now, it appears the US market is taking a breather from the carnage, but there is still a wall of worry in the financial world.

Yesterday’s hugely disappointing US manufacturing report has served as somewhat of a wake up call, prompting renewed worries about the US economy. This is on top of the global worries about a slowdown in China and emerging market nations.

Mitul Kotecha, an analyst at Crédit Agricole articulated the concerns that trouble investors right now:

“A combination of tapering, a confluence of country-specific emerging-market country concerns and weaker growth in China provide the backdrop for a volatile few weeks if not longer, ahead.”

The Nikkei, Japanese stock market, is now down 14% for the year. The S&P 500 is down around 7%.

Despite the renewed concerns about the US economy, Richmond Federal Reserve President Jeffrey Lacker said that it was unlikely the Federal Reserve would stop “tapering” (cutting back on bond purchases). We shall have to see if Lacker’s attitude is shared by others at the Fed if the economy continues to disappoint. New Fed Chair Janet Yellen is known as an inflationist who believes in the myth of easy monetary policy as an economic stimulant.

One factor that could definitely figure into Yellen’s decision-making is a new report from the Congressional Budget Office (CBO) that Obamacare will push the equivalent of about 2 million workers out of the labor market by 2017.

That’s a major jump in the nonpartisan budget agency’s projections and it suggests the health care law’s incentives are driving businesses and people to choose government-sponsored benefits rather than work. That would amount to a double whammy for the financial world as it contributes to higher deficit spending and higher unemployment at the same time.

It’s no wonder experts are urging investors to accumulate gold at current levels in anticipation of higher prices down the road.

1.30.14 – Fed Announces It Will Continue To “Taper”

Gold prices fall nearly 2% on higher U.S. dollar, equities gain. U.S. jobless claims jump 19,000 to 348,000. Gold last traded at $1,242 an ounce. Silver at $19.13 an ounce.

The Ben Bernanke era comes to a close tomorrow at the Federal Reserve and the Fed commemorated the event by announcing it would continue to “taper” its bond buying program in February by reducing bond purchases from $75 billion in January to $65 billion.

The Fed justified this decision by citing improved economic conditions, particularly improvements in the unemployment rate.

This is curious because the economic data in recent months has been mixed at best and the employment picture has been masked by steep declines in the labor participation rate to previously unheard of levels .

Of course, this assumes the Fed’s monetary “stimulus” can boost the economy in the first place, a dubious assumption to be sure.

Just this morning, there was yet more evidence of economic stagnation.

The number of people who sought U.S. unemployment benefits near the end of January rose to the highest level in six weeks. In the seven days ended Jan. 25, initial jobless claims jumped by 19,000 to a seasonally adjusted 348,000, the Labor Department said this morning . Economists had generally expected claims to edge up to 330,000.

Consumer confidence dropped last week to the lowest level in two months. The Bloomberg Consumer Comfort Index declined to minus 31.8 in the week ended Jan. 26 from minus 31 reading the prior period. The buying-climate gauge slumped to a three-month low. Retreating stock prices are probably damping sentiment among upper-income groups, while higher gasoline costs at the pump hurt the nation’s lowest earners.

Barring a large rally in the stock market today and tomorrow, the S&P 500 will be down for the month of January, an early warning sign that usually means further weakness ahead.

This will be the first January loss since 2009, and the largest monthly decrease in eight months.

The January barometer has been right in 62 of the last 85 years, or 73 percent of the time. Since 1929, the index followed January’s direction 80 percent of the time when it finished positive, and 60 percent of the time, when it finished negative.

More recently, in the past 35 years, the S&P 500 followed January’s direction 25 times, or 71 percent of the time (83 percent of the time for the Dow, and 74 percent of the time for the NASDAQ).

Volatility as measured by the VIX, is up 26 percent this month. Since the VIX was launched in 1986, there have only been three instances when the so called fear gauge gained over 15 percent in January.

In two of those times, the S&P ended the year down more than 5 percent. The other year, 1987, the market crashed in October, but managed to close positive.

While January is only one of 12 months of the year, history shows it tended to predict the year’s direction quite accurately. Meanwhile, another expert is forecasting higher gold prices in the medium and longer term. Lawrence Roulston of the Resource Opportunities newsletter had this to say about the value of gold to investors:

“Gold is headed higher in the medium term and the long term. There will still be a lot of volatility at play during the short term, but gold will continue its uptrend of the last 13 years. Gold is always going to have an intrinsic value. Think about the big selloff in paper gold last year. People were lining up to buy physical gold as investors were dumping exchange-traded funds and paper gold on the market. But central banks are still net buyers of gold. China is emerging as the biggest buyer at both the consumer and the central bank level. Gold has been the mainstay of financial systems for more than 5,000 years!”