Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
It’s a Global Economy After All
For those holding to the notion that the U.S. economy stands alone, impervious to the ills plaguing Europe and Asia, today’s market action served as a wake-up call. The shellacking that stocks endured originated in overnight trade when the German DAX shaved off 3.42% on the heels of some fairly soggy economic data. U.S. futures were off in sympathy before the opening bell, hanging on to the possibility of a strong US jobs report – which instead laid an egg. Only 69,000 jobs were created, and the unemployment rate rose to 8.2%. U.S. stocks continued to slide and bonds rose, while the dollar dropped and the metals spiked higher (See the box scores).
We could point to several economic and geopolitical events that occurred during the week (none of them good), that may have triggered the selloff in equities. The key development here is that, until now, the perception was that both Germany and the U.S. were essentially in fair economic shape, and that problems were limited largely to the PIIGS. After this week’s events, that perception has been dealt a serious blow – raising the question of precisely who will be “bailing out” whom. In other words, Germans (or U.S. citizens) may not be fiscally willing or able to rescue distressed nations such as Greece when faced with a recession of their own. All this is to say that loans backed by Germany (and France) to aid struggling countries may be slated for extinction – in favor of the only alternative not yet fully embraced by the ECB – flat-out money printing. We shall see.
Technically and fundamentally, events of the week were bullish for the metals and the shares. Gold finished just above its 50-day moving average of 1623, while silver gained momentum, shrugging off the usual concerns over industrial demand during economic contractions. Metal shares also turned in a solid performance, advancing 6.4% (as measured by the Market Vectors fund: GDX) during Friday’s trade. Metal shares broke their 50-day moving average to the upside rather decisively, suggesting the 100-day average is next in line.
Of course, much may depend on the Fed. In the case of the metals, it’s clear that their advancement today was highly correlated with increased expectations of QE3, given the Fed’s mandate of “full employment.” In that regard, we should get a better idea of any policy change following the Fed’s next meeting on June 20th – unless it convenes an emergency meeting before then. If the Fed should decide not to print, which is possible, the metals may trade as the “safe haven” of choice, relative to an extremely overvalued U.S. Treasury market.
VP Investment Management