US equities were slightly mixed during trading on Friday capping an end to an epic week of more all-time market highs. This marks the 19th time this year that the S&P 500 has made a new record high. All three indices finished noticeably higher for the week, with the Nasdaq 100 leading the pack with an impressive 2.36% weekly gain.

With one of the worst market sell-offs of 2017 occurring only two weeks ago, much of the political fear and investor trepidation that sparked the sell-off has evidently subsided. The 6-day-long market recovery suggest investors took advantage of the discounted prices and capitalized on a buying opportunity.

Shares of major tech companies were some of the best performers of the week. So far this year, tech shares are up around 20% with the big name giants, Amazon, Google, and Facebook outperforming the broader market by a mile.

On the other hand, shares of energy companies did not fare so well last week as the price of crude oil plummeted. Although members of OPEC agreed to extend production cuts into March of 2018, oil prices starkly declined when the news broke that a production cut agreement has been reached. Because reducing the supply of oil is supposed to boost prices, declining prices confused analysts and investors alike.

“The market seems to have lost faith in OPEC’s ability to do whatever is necessary to reduce the massive oversupply and to bring inventories back to the five-year average” by the first quarter of next year, said Thina Saltvedt, an analyst at Nordea Bank AB, when trying to explain the strange reaction in the market.

The price of oil matters not only because it correlates to the price people will pay at the pump, but it also matters because oil and the energy industry as a whole resemble a significant percentage of what most people refer to as “the stock market”.

The energy sector represents 6.3% of the companies in the S&P 500, and the sector is currently down 12.13% year-to-date. Although oil rebounded on Friday, prices still closed in the red for the week, thereby stumping gains in the entire S&P 500 index.

However, not everyone takes such a pessimistic outlook on the energy sector and oil. An oil analyst from BNP Paribas, Harry Tchilinguirian, views the OPEC meeting as a success. He noted that “if agreements had fallen down this would have been a return to the dark days of 2014 and 2015, when it was every producer for themselves.”

Regardless if oil goes back to $100 a barrel or $30 a barrel, the effects will definitely be felt in the equity markets.

In terms of other commodities, gold and silver continued a three-week-long winning streak with the precious metals advancing 1.17% and 3.27% for the week, respectively. Gold is now above $1,270 an ounce and well within striking distance of forming a new YTD high above $1,297.40. Recent terror attacks in Manchester have seemingly increased the desire to move additional cash over to safe-haven precious metals and shy away from riskier assets.

Remember back to college economics? Good old supply and demand? Well, the numbers are tilting favorably for silver. Simply put – the silver equation shows more demand than supply and that is bullish for prices ahead.

Global silver mine production fell in 2016, for the first time since 2002, according to the newly released World Silver Survey 2017 (Silver Institute and GFMS Team at Thomson Reuters.).

Here’s the numbers:

2016 Supply              1007.1 million ounces

2016 Demand           1027.8 million ounces

Doing the math, that leaves a silver deficit of -20.7 million ounces and ultimately puts upward pressure on prices.

Where Does The World’s Silver Come From?

On the supply side, Mexico was the largest silver producer in 2016, followed by Peru, China, Chile and Russia, the report said.

Who Uses Silver?

Silver is both an industrial and precious metal. Investors who purchase silver see a dual demand base for this commodity currency.

On the demand side, industrial fabrication made up the largest component in 2016 totaling 561.9 million ounces. Jewelry stands in second place at 207 million ounces and coins and bars are in a close third at 206.8. Silverware comprised 52.1 million ounces of total demand in 2016.

It is well known that physical ownership of silver offers investors many of the same diversification properties as gold, but at a much lower entry cost. Gold trades at about $1,257.00 an ounce right now, while you could purchase an ounce of silver for about $17.00 an ounce.

New applications for silver are exploding in industry and manufacturing, which will keep upward pressure on prices. Demand is growing, while supply is shrinking due to reduced mining.

Here’s one example: in 2016, silver demand for photovoltaic applications skyrocketed by 34 percent rise to reach 76.6 million ounces. This growth was the strongest since 2010 and driven by a 49 percent increase in global solar panel installations, the Silver Institute said.

Learn More

Read about fascinating new applications for silver in this LinkedIn article authored by Blanchard CEO & President David Beahm.

Follow David on LinkedIn for weekly updates on precious metals investing.

Investing Strategies

Investors turn to physical precious metals as an important component of portfolio diversification. Many studies have shown that when stock prices go down, gold and silver prices tend to rise – often significantly. Owning physical gold and silver is appropriate for all investors and can improve your long-term investment prospects. The latest supply/demand figures for silver only underscore the positive long-term price outlook for silver.

Silver prices have already been climbing in 2017. Now is a good time to add physical silver exposure to your portfolio before prices climb even more.

A great option to add to your portfolio are silver bullion coins. The 2017 1 ounce American Silver Eagle can be purchased right now for around $19.37. Market prices change daily, call Blanchard for today’s price at 1-800-880-4653.

Fresh new controversy regarding the Trump administration surfaced on Tuesday night of last week, and the market’s reaction was harsh.

By the end of the day on Wednesday, the Nasdaq 100 was down a little over 2.5%, and the S&P 500 and Dow Jones were both off roughly 1.5%. Given that a major market index has not moved more than 1% in a long time, Wednesday’s trading activity was quite serious and definitely put investors on the edges of their seats.

On an intraday basis on Wednesday, there was simply no reprieve for passive stock investors; every uptick was short-lived. The real talk of the town, however, was the explosion in volatility. The VIX index soared over 35% to climb above 15.

The explosion in volatility is highly interesting, because volatility hit a 23-year low two weeks ago. An article published on Blanchard’s investment page noted the interesting correlation between fresh new lows in volatility and imminent stock markets selloffs. Although it’s impossible to predict extemporaneous political events, the events always seem to occur right after volatility reaches an extreme low.

Because there was a surprising amount of complacency among investors, as noted in the article, the market reacted quite violently as investors rushed for the exit when news broke of President Trump’s recent activity. Investors immediately became less optimistic about proposed tax reform and all of Trump’s promised pro-growth policies.

If he were to be removed form office in an total worst-case scenario, it seems logical that much of the recent market run-up, that’s predicated on his aforementioned growth agenda, would unwind. Even if the administration’s scandal is overblown, it might be more difficult to push through new reform with obstinate members of congress who look at Trump’s recent activity with disdain. This was the logic behind Wednesday’s sell-off.

Both democrats and republicans in congress were also unnerved with the fact that Trump apparently asked the former FBI director, James Comey, to stop an investigation into a mutual connection.

There was talk of comparing Trumps current situation to that of Richard Nixon’s and the infamous Watergate scandal. During the mid 1970s in the height of the scandal, the S&P 500 cratered over 50% throughout the course of the year. As per usual, whenever the market is caught off-guard by a jarring situation, especially a political one, investors seek the safety of gold and bonds. As such, gold was up more than $24 an ounce on Wednesday.

“This week political risk has caught up on the market but it’s still unclear whether it has any legs,” said a Deutsche Bank strategist in a note to clients Friday.

Since Wednesday, much of the fear has subsided and better news has surfaced regarding the current political situation. The rebound in stocks gained more traction on Friday, but gold demonstrated its beauty as an investment as it kept above $1,250 an ounce and didn’t give up much of its gains.

During trading on Tuesday of last week, the CBOE VIX index fell to 9.56, a level not seen since 1993. Although the VIX climbed above 10 later in the week, everyone on Wall Street was buzzing about the record breaking level of low volatility. But what does this mean for the typical investor?

Well, the price/level of the VIX is derived from the pricing of near-term options on the S&P 500 index. A low VIX level equates to cheap options premium, and thus, narrow trading ranges and an absence of fear in the market. Many analysts were baffled that volatility and investor fear could be so low amid foreign presidential elections, unprecedented domestic political change, and reoccurring nuclear threats from North Korea. Despite all of these potential threats, and more, the VIX sank to a multi-decade low. 

However, the VIX was not the only index that set a record last week. On Monday, the S&P 500 index hit a fresh all-time high of 2,401.36. The new all-time high was mostly driven by upbeat earnings announcements. Despite briefly rallying on Monday, disappointing earnings from a few of the main retail clothing stores weighed on the market in the final trading days of the week.

Nonetheless, given that stocks are staying near their highest levels in history, a low amount of fear in the market seems reasonable.

“Overall the economy is still growing, unemployment is still extremely low, inflation is very much in check and the US Federal Reserve is raising rates but at a very low pace. I think all that is positive for risky assets.” said Mandy Xu, derivatives strategist at Credit Suisse.

Essentially, a stock market that just keeps climbing, like we have now, seems to be the perfect recipe for a very low VIX. But if the past offers any indication of the future, it might not be entirely smooth sailing ahead. There is a noticeable correlation between low VIX levels and sudden market sell-offs.

When the VIX dropped below 11 for the first time in years on August 6^th, 2015, preciesly18 days later on August 24^th there was one of the worst intraday market crashes in history. The S&P 500 cratered as much as 10%, the VIX subsequently soared above 50, and spot gold climbed double digits.

The logic behind quickly transitioning from a low volatility environment to a high volatility environment is primarily attributed to the fact that investors are not pricing in any wild price fluctuations. Because of this, investors can rapidly and easily be caught off guard when the market turns against them and positions are not hedged due to low fear sentiment, i.e. a low VIX. 

Only time will tell if the historic low in the VIX made last week will precipitate imminent stock market turmoil. One thing is for certain, however, if a little market chaos is indeed lurking around the corner, those who stand to benefit the most are gold owners.

Today, the stock market resembles the calm surface of a quiet ocean. The CBOE VIX Index (the “Fear Gauge”) recently reached a 23-year low. This standard measure of anticipated volatility in the equities market reflects a broad sentiment of complacency among investors. The market doesn’t expect a significant upswing or downturn anytime soon.

More than ever, the market seems is willing to shrug off major events. “Brexit” has exerted little impact. Trump’s election has only helped stocks, and even the recent news of Comey’s firing has done little to destabilize investor confidence. However, below the surface, there is reason to question the future of equities even for passive investors.

Too many investors see calm markets without considering one important number, the Shiller P/E ratio. In short, this single number measures valuation among the stock market. The calculation divides a stock’s price by its earnings while adjusting for inflation.

A high Shiller P/E indicates stocks are highly valued and expensive. A lower figure means stocks are cheap. Today, the Shiller P/E is 29.7. Why is this finding significant? At 29.7 the Shiller P/E is 76% higher than the historical mean of 16.8.

Moreover, this figure sometimes called the cyclically adjusted price-earnings ratio (CAPE), is the highest on record except for 1929 (market crash) and 2000 (dot com bubble bursting). Over the decades, a clear pattern has emerged. Heightened Shiller P/E ratios tend to occur shortly before a significant market downturn or “correction.”

The problem with a high figure like this is that it reflects the astronomical expectations of investors. At such high valuations and expensive prices, stocks will need to deliver outsized returns to justify their share prices. What if they fail? If these companies are unable to deliver, the market will fall.

Does this mean investors should expect a crash? The answer is no. However, these numbers should instill a sense of vigilance. Volatility might be low amid a soaring equities market, but valuations are equally high. This dichotomy sets the stage for disappointment. Meanwhile, increasing uncertainty surrounding the U.S. political landscape is building. Shiller, the man behind the formula, remarked in Q1 of this year that it’s “high enough to worry about.”

Shiller continued by suggesting “reducing your holdings of stocks, especially for a long-term investor. We can’t time the market accurately, but we know that when it’s this high, over the long term, it usually doesn’t do great.” These comments come from a man who won the 2013 Nobel Prize in Economics.

Equity investors take note. Today’s market might be sending signals that diversification is more important than ever. No one can forecast a crash or proclaim that one is imminent. However, a smart read of the market gives investors reason to reconsider their asset classes. Being too heavy in stocks without an exposure to uncorrelated assets like gold is dangerous because it leaves risk unbalanced.

Investors can take this early opportunity to reevaluate their portfolio to ensure they’re safeguarded in the event we see a market resembling 1929 or 2000.