Experts Weigh in on US Stock Market Action

Monday (February 5) was a scary day for US stock market investors.

The Dow Jones Industrial Average (INDEXDJX:.DJI) lost 1,175 points that day, closing down 4.6 percent, at 24,345.68 points. At one point in the afternoon, the Dow was down over 1,500 points and recorded its greatest percentage decline since August 2011.

The S&P 500 (INDEXSP:.INX) was not far behind, losing 4.1 percent on Monday to end at 2,648.96 points — its losses for the day erased its gains for the year, as did the Dow’s. For its part, the NASDAQ Composite (INDEXNASDAQ:.IXIC) closed Monday down 3.8 percent, at 6,967.53 points.

Unsurprisingly, the losses in the US stock market spilled over into Canada, with the S&P/TSX Composite Index (INDEXTSI:OSPTX) falling for a sixth consecutive day and ending down 1.7 percent.

“The speed at which the decline developed is typical of a bear market,” Steven Hochberg, chief market analyst for Elliott Wave International, told the Investing News Network via phone.

Hochberg said bear markets usually unfold faster because the “emotion undergirding a bear market is one of fear.” He said evidence of fear was present in volatility products because exchange-traded funds and notes designed to move up through the CBOE Volatility Index (INDEXCBOE:VIX) “got in trouble in terms of the pricing, and in terms of people’s ability to move in and out of them.”

For example, the VelocityShares Daily Inverse VIX Short-term ETN (NASDAQ:XIV) was down 80 percent in after-hours trading. “We find it ironic that it’s volatility that’s destroying the derivative products designed to trade on volatility,” said Hochberg.

The White House responded to the stock market drop with a statement from spokesperson Sarah Sanders. She said US President Donald Trump is focused on the country’s “long-term economic fundamentals, which remain exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increasing wages for American workers.”

The market action occurred on Jerome Powell’s first day on the job as chair of the US Federal Reserve. Hochberg said eventually the Fed will be forced to pull back from raising interest rates as the market declines, and will “bow to the markets as it usually does.”

US exchanges experienced volatile trading action on Tuesday (February 6), but all major indices gained over 1 percent at the close. The Dow gained 567.02 points, or 2.33 percent, to close at 24,912.77 points. Meanwhile, the the NASDAQ ended up 148.35 points, or 2.13 percent, to close at 7,115.88 points. The S&P gained 37.37 points, or 1.41 percent, to end the day at 2,686.31 points.

In Canada, the TSX gained a modest 29.12 points, or 0.19 percent, to close at 15,363.93 points.

Looking ahead

Hochberg expects to see more downside in the market. “There’s near-unanimous opinion right now that there’s nothing to worry about. This is expected, and it’s just a pullback in an ongoing bull market. Our view is something different. This is the start of something much deeper and longer in the market.”

Other experts, including Jeffrey Christian of CPM Group and Peter Schiff of Euro Pacific Capital, have also forecast a market correction in the future.

Last month, Christian said he “wouldn’t be surprised to see a 10, 15 or 20 percent market correction in the S&P 500 or the Dow Jones over the course of the year” because the market “has been a little overheated in terms of stocks.” However, he thinks that won’t be the end of it. “We think there will be a much bigger financial crisis probably five to seven years from now,” he added.

Investor takeaway

Gold and silver prices experienced marginal declines on Tuesday, reaching about $1,323 and $16.61 per ounce, respectively. The move surprised some market watchers, as precious metals are typically seen as safe-haven assets. Hochberg countered, “gold historically has not really acted as a safe haven. Gold usually does well when the economy is doing well. Not when things are bad.”

He said gold hit its most recent high on January 25, one day before the Dow reached a peak. At the time, one investor poll revealed that 91 percent of respondents were bullish on gold futures.

“That was an extraordinarily high level of people that were very optimistic that gold would continue to rally. To us, gold is just another financial instrument, just like stocks. Our anticipation is that when the market goes down, gold and silver will be going down too,” explained Hochberg.

Speaking to MarketWatch, Adrian Ash, director of research at BullionVault, offered a different explanation for the lack of interest in gold this week. “Gold isn’t guaranteed to rise when equities fall. Indeed, it may drop amid a severe crash if fund managers sell to cover losses on other assets,” he said. “But that is part of gold’s role as insurance, because it offers a deep and uniquely liquid market of diverse buyers.”

Similarly, Naeem Aslam, chief market analyst at ThinkMarkets, said, “gold isn’t acting like a haven because there is no real panic in the market.” The Fed is “going to adopt a more aggressive stance towards their monetary policy and this is keeping traders away from gold.”

For his part, Hochberg advises investors to focus on safe assets such as short-term treasury bills or cash because “there’s no downside to being safe. The only thing that might happen is you might miss out on some of the upside moves. But that’s much better than having your money in the market right now and watching your retirement go down as the major indices go down.”

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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.