Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Believe What They Say, Not What They Do

Comments made by central bank authorities Yellen and Draghi took center stage for the markets this week. Doublespeak and jawboning dominated their remarks, but the takeaway was that additional stimulus would be needed – even if not immediately. Yellen reiterated the Fed’s tapering plans, but she provided very little proof that the economy had reached the coveted “self-sustaining” level. Instead, she warned that housing and jobs remain obstacles in the way of economic momentum. Drahgi’s comments were similarly structured, stating that the EU had recovered from the PIIGS debt crisis, but he emphasized once again the need to be “accommodative for an extended period of time.” Drahgi intends to lower the ECB’s benchmark rate to 0.00% from 0.25% at the next meeting in June.

Stocks performed in mixed fashion. Bulls seemed emboldened by Drahgi’s intention to lower rates, but stocks still had a hard time gaining any momentum. Rallies have been systematically arrested by higher volume selling – as seen in the NASDAQ Composite (e.g., Tesla, Priceline, and Twitter) and the Russell 2000 (small caps). Buying appears to be favoring Dow and S&P 500 stocks in what looks like a fairly substantial flight to quality, which has allowed these latter indexes to remain at or near record highs.

That said, however, the tone has certainly changed. It’s reminiscent of the tech collapse in 2000, when the NASDAQ experienced steady losses starting in March but the Dow didn’t echo the decline until after May of 2001. There weren’t many visible warnings signs back then for investors to react to, and the same holds true today. Earnings are good – at least as far as the consensus view is concerned. But the quality of those earnings has been eroding for some time now, and Wall Street may have determined that the prospects of gaming those earnings yet higher is slim, hence the selling. Of course, that’s speculation on my part – but the shoe fits.

Gold is still waiting in and around the 1285 level for the Fed to change its tune about tapering and return to a more dovish tone. May data supports this thesis thus far, but the Fed’s standoff with stocks may take precedence in the short run. In other words, tapering will continue until the Fed sees a healthy rotation out of stocks into bonds, where funding is desperately needed. Incidentally, the Fed is in the process of adding money market funds to the list of those responsible for upping their Treasury exposure – bills, in this case, but the Fed’s desperation abounds. In the meantime, a more bearish tone in stocks may prove a boon to the precious metals, as it has in recent past, but we shall see.

Best Regards,

David Burgess
VP Investment Management