foxex: THANKS, JAY!

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Thanks, Jay!

2. Chart of the Day: Gold Could Shine in 2019

Markets Close

Dow
24,947.67 -0.32%

S&P
2,695.95 -0.15%

Nasdaq
7,188.26 +0.42%

VIX
21.19 +2.17%

INV Anxiety Index
99.34 Neutral

US 10-Yr Yield
2.8760 -1.64%

THANKS, JAY!

Right around lunchtime on the East coast, U.S. markets were headed for a three percent decline. Capitulation was the soup du' jour, and it was served cold. The DJIA was on pace for a 1,600 point, two-day decline, and it was hard to know what could make it stop. A high-ranking executive from China's Huawei was arrested in Canada and set to be extradited to the U.S., which had the potential of souring the punch at the tariff peace party. Circuit breakers at the futures exchanges were being tripped as the sell signals came pouring in, and we were headed for a bloody day of stock trading.

In walked Jay Powell, Fed Chairman and frequent target of the President's ire. Actually, it was an article from the WSJ reporting that the Federal Reserve was suddenly considering a "wait and see" approach on rate hikes in 2019. Inflation had suddenly become more tame thanks to falling oil prices. Some may say that the volatility and negative investor sentiment may have prompted the Fed to reconsider its plan to continue hiking rates next year, but you'll never hear the federal agency say that.

Either way, markets bounced back like Popeye after a can of spinach. The DJIA erased 700 points of losses, while the S&P 500 and Nasdaq closed in positive territory. Call it a "Fed Rally," because there was no other catalyst to prompt that turnaround.

Why it Matters:

Let's keep it real for a minute... Half of the S&P 500 is in a bear market. Bank stocks have been absolutely blistered since September, and the FAANG stocks have been filed way down to size. Many market watchers think we are already in a Bear market, even though we haven't reached the levels that classically define one. The shift to value stocks and healthcare is fully in place, cash is king, and even gold has shone its shiny head again. (We go into detail about the recent rise in the precious metal in our chart of the day, below.) As JC Parets, founder of All Star Charts and friend of the site, likes to say, "These are not the characteristics of an uptrend..."

We also saw the yield curve invert as the yield on the three-year U.S. Treasury note surpassed that of the five-year, which many took to be a sign of an upcoming recession. Usually, it's the inversion of the 10-year and the two-year note that makes people use the "R" word, but we seem to be living in compressed times where no one has the patience to think about what the economy will look like a decade from now. For what it's worth, the yield on the 10-year fell below three percent on Monday after hanging above it for a few months. Remember... the bond market is forward looking, and bond investors may have had a feeling Powell and the Fed were going to slow down sooner, rather than later. Powell alluded to that possibility in a speech last week when he likened the impact of the rate increase plans to "...walking into the living room and having all the lights go out." That's code for "we need to be careful lest we break something precious."

What's Next:

It's that wonderful time of year when the research departments at global banks and investing institutions make their predictions for next year. They used to be fairly accurate, but the world has become very unpredictable lately, if you hadn't noticed. Most of the reports we have read are predicting somewhere between a 30 and 60 percent chance of the U.S. entering a recession by the end of 2019 or early 2020. It's worth noting that many of those same institutions predicted we would enter one in 2017 if Trump got elected.

That said, we do read and respect the research from Savita Subramanian and her team at Bank of America Merrill Lynch. It's thorough and reasonable.

Here are a few of their highlights:

The S&P 500 will end 2019 at 2900 and will peak around 3000 sometime during the year
The Fed will continue to tighten monetary policy
Cash is a real alternative to stocks and will remain so
Volatility is here to stay

Take it for what it's worth, and always do your own research. It's just good to know what the pros who get paid to do this think.

In other news...

Investors Rush to Cash as Risk Escalates

Naturally!

Why Nike could post new highs in 2019

Just do it!

It's getting cheaper to fly to Europe

I'd love to!

Costco is opening its own chicken farm

So fowl!

Chart of the Day: Gold Could Shine in 2019

Gold has gotten a lift from recent remarks by Fed Chairman Jerome Powell, indicating that interest rates may be approaching "neutral." If so, the central bank will slow its rate hike activity in 2019, allowing the yellow metal to test critical resistance levels that have frustrated gold bugs for the past five years. Hopefully, Powell will clarify his apparent dovishness at the press conference that follows the Dec. 19 interest rate decision.

Gold could also benefit if the U.S. economy slows down, but inflation continues to grow as a result of protectionist policies that are adding hidden costs to everyday consumer goods. The Fed may be hamstrung in that doubly bearish scenario, forced to sit on its hands or even reduce rates to deal with an impending recession. Worldwide political tensions could drive gold prices even higher as well, bolstering the commodity's long-held reputation as a safe haven.

The next 90 days will clarify gold's 2019 trading tone, with market players squarely focused on the trade standoff between China and the U.S. A duty increase to 25% and an expansion of the tariff hit list may shock the U.S. economy into a cyclical contraction while gold bugs get a major relief after years of watching their favorite trade go nowhere. Conversely, an agreement and rapprochement could add another leg to the aging bull market while gold drifts back toward $1,000 per ounce.