Gold Miners Are Crushing The Market In The Face Of Higher Rates

Disregarding strong opposition from the likes of DoubleLine Capital founder Jeffrey Gundlach, legendary hedge fund manager Stanley Druckenmiller, “Mad Money” host Jim Cramer, President Donald Trump and others, Federal Reserve Chairman Jerome Powell hiked rates on last Wednesday for the fourth time in 2018.

Gold Miners Are Crushing the Market in the Face of Higher Rates

Markets responded negatively, with the Dow Jones Industrial Average jumping around in a nearly 890-point range before closing at its lowest level in more than a year. By the end of the week, both the small-cap Russell 2000 Index and tech-heavy Nasdaq Composite Index had entered a bear market, while the S&P 500 Index was on track for not only its worst year since 2008, but also its worst month since 1931.

Among the sectors now in a bear market is financials, down around 20 percent since its peak in January. Regional banks, as measured by the KBW Regional Bank Index, have been banged up even worse, having fallen close to 30 percent since their all-time high in early June.

Canary in the Coal Mine? U.S. Financials Are Now in a Bear Market

I bring up financials here because the sector is sometimes considered to be the “canary in the coal mine,” for the very good reason that financial institutions are highly exposed to the performance of the broader market.

What’s more, we learned last week that lenders are starting to pull back from riskier loans, a sign that they’re getting more cautious as recession fears loom. According to the New York Fed, the credit card rejection rate in October climbed to 21.2 percent, well above the year-ago rate of 15.7 percent. Banks also cut off credit from 7 percent of customers, the highest rate since 2013.

Fund Managers De-Risk in Favor of Bonds and Cash

Against this backdrop, fund managers have turned incredibly bearish on risk assets and bullish on defensive positions such as bonds, staples and cash. According to Zero Hedge’s analysis of a Bank of America Merrill Lynch report, this December represents “the biggest ever one-month rotation into bonds class as investors dumped equities around the globe while bond allocations rose 23 percentage points to net 35 percent underweight.” Fund managers’ average cash levels stood at 4.7 percent in November, above the 10-year average, according to Morningstar data.

Investors Just Poured a Record Amount of Money Into Bonds

Equity outflows have been particularly pronounced. Lipper data shows that, in the week ended December 13, as much as $46 billion fled U.S. stock mutual funds and ETFs. That’s the most ever for a one-week period. It’s very possible that the selling is related to end-of-year tax-loss harvesting, but again, we’ve never seen outflows of this magnitude.

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Disclosure: The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The Russell ...

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