Markets Dump, Gold Soars

With a shortened trading week due to a holiday, domestic equity markets closed in the red last week as more news came into the spotlight regarding renewed military action in the Middle East. This marks the second consecutive weekly loss for stocks.

On Thursday afternoon, the US announced it had deployed the largest nonnuclear bomb in history on an ISIS tunnel complex in Afghanistan. Equity markets did not react well to the news, to say the least.

The financial sector took a particularly severe hit, declining 2.6% for the week. Despite the fact that two of the largest banks in the country, JP Morgan Chase and Citigroup, both beat analysts’ expectations for revenue and adjusted earnings per share last week, both companies saw dramatic declines in their stock prices after news of the military strike in Afghanistan.

When asked if the bomb serves a message to North Korea, President Trump said, “I don’t know if this sends a message. It doesn’t make any difference if it does or not. North Korea is a problem. The problem will be taken care of.” Judging by the market reaction, investors did not interpret this as a particularly calming and reassuring statement. As such, the typical “fear asset,” gold, rapidly transformed into the biggest buying frenzy of the week.

Gold soared to its highest level of 2017 and posted its best weekly gain in almost a year. Precious metals are once again the best performing asset class of 2017, with silver and palladium topping the charts with 15.38% and 16.37% gains, respectively. Gold’s 11.36% YTD gain is finally enough to outshine the Nasdaq 100’s YTD gain of 10.22% for the first time, thereby making gold one of the top performing assets this year.

“We’re in a wait-and-see mode at the moment,” said Kate Warne, a principal and investment strategist at Edward Jones. This certainly seems to be the case as investors are facing unprecedented military and policy events left, right, and center.  Moreover, going into the close, gold and volatility (as an asset class) hardly declined at all. In fact, gold rallied into the close and finished only $0.60 away from the YTD high it made early Thursday morning.

For now, it seems “the fundamentals have and will continue to drive the market,” Ms. Warne went on to say. She noted how a group of upbeat earnings reports could lift equities in the coming weeks.

However, if JPM and Citigroup are any indication of what’s to come for stocks, the outlook may not be as optimistic as the strategists ad Edward Jones would like it to be. Meaning, two of the biggest banks in the US posted incredibly positive and solid earnings, but both stocks significantly declined on news of the direct military action in Afghanistan. What does this tell investors?

Well, it has left many investors scratching their heads, because earnings can’t be any more upbeat for blue-chip companies than they were for JPM and Citigroup. Therefore, if declining markets are the reaction to upbeat earnings reports, what will the market reaction will be if a collection of earnings reports are not upbeat? This is the scary reality facing investors today.

This possibility, combined with the potential for more news of US military strikes and stone-cold tensions with North Korea could easily worsen the existing equity market sell-off and instigate a completely uncontrolled tailspin that simultaneously sends precious metals into even more of a buying frenzy.