Disregarding strong opposition from the likes of DoubleLine Capital founder Jeffrey Gundlach, legendary hedge fund manager Stanley Druckenmiller, President Donald Trump and others, Federal Reserve Chairman Jerome Powell hiked rates on last Wednesday for the fourth time in 2018.
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 last Wednesday for the fourth time in 2018.
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 A Coal Mine? U. S. Financials Are Now In A Bear Market U. S. Global Investors
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.
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 Into Bonds U. S. Global Investors
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.
As such, I highly encourage investors to heed the recent advice from Goldman Sachs: Get defensive by positioning yourself in “high-quality” stocks. This probably isn’t the time to speculate.
I would also recommend gold and gold stocks. The yellow metal, as expected, is performing well at the moment, and commodity traders have taken a net bullish position for the first time since July. So far this quarter, gold has crushed the market, returning around 6 percent as of December 21, compared to negative 15 percent for the S&P 500 Index. Gold miners, though, as measured by the NYSE Arca Gold Miners Index, have been the top performer, climbing a phenomenal 12.3 percent.
Gold Miners Have Been the Standout Performer This Quarter U. S. Global Investors
On a recent episode of “Mad Money,” Jim Cramer aired his frustration with the Fed’s decision to move ahead with another rate hike, predicting that the central bank will “have to reverse course, maybe in the next four months.” When and if that happens, “you’ll regret selling because the market will rebound so fast.”
But in the meantime, Cramer says, investors should consider buying into the “bull market” in gold.
