As the first presidential debate is scheduled this week increased volatility can be expected. While Joe Biden enjoys a somewhat large lead over Trump it remains uncertain whether he will be able to defend this lead in a one-on-one debate with Donald Trump. Everyone remembers the peculiar and comical debates of last elections where Donald Trump was clearly the winner. And as Biden is known for stumbling over words and forgetting elements of speeches, leading Trump to call him “Sleepy Joe”, this could be a turnaround for Donald Trump. A comeback of Donald Trump would mean this weeks bleeding stock markets could perhaps regain some its lost ground.
This week one of the strongest bull run rallies definitely came to an end, several macro signs pointed to lower liquidity and a lack of stimulus out of Congress has hurt financial markets hard. Specifically the junk bond ETF’s saw huge outflows this week. And while extra employment benefits dropped and but more and more employees on temporary furlough received bad news, the amount of people receiving benefits unexpectedly increased. This news was the only light bulb in an overall bad week for precious metals that once again where hurt badly by firm sell-offs. Next to the U.S. presidential elections there still is the corona outbreak, a lingering danger for markets, several nations had to impose new lockdown rules and limitations after several nations have experienced a re-surge in cases.
Winter is coming and a new round of lockdowns would mean the start of many bankruptcies. As the corona virus keeps lingering, the trade-off between economic prosperity and people’s lives becomes harder and harder. However, as scientist learn more about the virus, treatment has improved tremendously over the months. But taking into consideration that the last six months risk-on mode was on, sharp sell-offs like this week’s can be expected. Supported by vaccine news and election news, but dragged down by macro data on employment and liquidity it remains uncertain what way markets will go. To stay safe it is advisable to hold cash and low volatility stocks, and even though flash traders like Virtu Financial (VIRTU) and Flow Traders (FLOW) have lost some ground after volatility dropped in July to August, they provide some safety against fast sell-offs as hedge coming weeks. Together with stocks like Walmart (WMT), Flowers Foods (FLO) and Treehouse Foods (THS) lower volatility can be incorporated in every portfolio.
The Gold Bull Run Is Not Over, However Abiding Sell-Offs Pose Danger
As of today gold has dropped to a two month low with a support level at around 1850-60 USD/oz level. At current valuations there seems to be more room for markets to drop, a potential danger to the short term gold prices. Only if gold steadily remains above a certain price level the gold bull case can continues. For now, it is justified to sit back but remaining watchful for a possible resurgence of gold and silver. Precious metal miners have lost almost a quarter of their post-covid gains it is tempting to get back-in at these levels. The massive amount of debt that is created over the last few months will prove to support gold prices on the long term. But while the FED awaits the struggling Congress to make further moves, gold prices can still drop on the short term. The massive outflow out of junk bond ETF’s is a symptom of a vast drop in liquidity that makes the FED wary. In their latest statement the FED explicitly called out Congress to push through a new stimulus package, Powell told Congress it’s up to them to provide fiscal aid to some troubled companies that cannot even afford new loans.
Closely monitoring the stock market is necessary the coming weeks, it will be interesting to see if unemployment levels keep to stay unexpectedly high and if the everlasting struggle of companies will result in more drops in liquidity or that vaccine news can boost confidence and liquidity. Nothing is certain, but higher volatility is.
Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.