• The Dow Jones Industrial Average (DJIA) traded moderately lower on Thursday.
  • Gold hit a seven-year high as investors hedge against coronavirus economic impact.
  • Stocks and gold rallying together are ‘striking’ and could be a warning sign for global stock markets.

The Dow Jones Industrial Average (DJIA) slipped into negative territory on Thursday following a nervy stock market open. It comes as gold stormed to a seven-year high – a potential warning sign that investors are hunting for safety.

It’s no surprise that investors are flocking to gold as the coronavirus threatens to slow down the global economy. But what is strange is that both stocks and gold are both at or near multi-year highs.

Taken by themselves the returns might not seem particularly extreme, but simultaneous rallies of this size … are indeed striking – Bank of America strategists in a note to clients.

Gold and equities have a traditionally low correlation. When they both move up together, it may be a warning sign. Something has to give.

Dow slides on Thursday

The Dow slid 52.04 points or 0.18% on Thursday, forcing the index down to 29,295.99.

The decline was triggered in part by Bernie Sanders emerging as the clear Democrat front-runner and ongoing coronavirus nerves.

The Dow Jones Industrial Average (DJIA) edged lower on Thursday. | Source: Yahoo Finance

It didn’t help matters that Federal Reserve Vice Chairman Richard Clarida downplayed the prospects of an impending interest rate cut during an interview with CNBC.

Futures market data suggest that traders expect the Fed to lower its target rate by its July 29 meeting. But rates are already low, and the central bank fears that further cuts could leave it powerless to fight the next recession.

The S&P 500 and Nasdaq fell 0.17% and 0.24%, respectively.

The ‘everything rally’ can’t go on forever

Something odd is happening in the financial markets. Everything is going up.

BofA strategists said:

There simply has not been a bad long trade in broad U.S. assets this year.

U.S. stocks are near record highs. The dollar is up. Gold is at seven-year highs. Speculative stocks (Virgin Galactic and Tesla) have doubled in a matter of months.

One analyst discovered that 19 exchange-traded funds (ETFs) are near record highs. That includes a number of bond trackers that shouldn’t be positively correlated with stocks.

One possible explanation for this is the emergence of a late-stage euphoria blow-out.

Hedge fund manager Leon Cooperman said:

We’re at the early stage of knocking on the door of euphoria but not quite euphoria.

Gold (orange line) and the S&P 500 (candlesticks) have broadly moved higher in unison over the last 12 months. Source: TradingView

Is gold flashing a warning sign to the stock market?

The rise of gold tells us that investors are nervous about the global economy. And no wonder. The coronavirus outbreak has the world’s second-largest economy on lockdown. Apple confirmed the outbreak would hit revenue. And the biggest shipping company on the planet said trade has slowed down.

Gavin Wendt, senior resource analyst at MineLife Pty added:

Support for the yellow metal is driven by economic uncertainty related to the coronavirus – i.e. how long could the pandemic last and what will its ultimate impact be on world economic growth?

But it seems the U.S. stock market hasn’t noticed.

The Dow Jones could still go higher

The ‘everything rally’ is unusual, but it doesn’t mean a crash is imminent. An alternative read on this move is the strength of the U.S. economy.

An excerpt from Bloomberg reads:

American stocks are usually perceived as safer than the rest of world partly because the market’s sheer size and deep liquidity make them less vulnerable to shocks.

In that scenario, U.S. stocks and gold can rally together, acting as a joint safe haven from global shocks. Until more is known about the coronavirus impact, gold and the Dow Jones could keep on carving out highs together.

With additional reporting by Josiah Wilmoth

This article was edited by Samburaj Das.

Last modified: February 20, 2020 2:48 PM UTC



Source

Give a Reply