Given the way markets have stagnated in recent years under unprecedented amounts of central bank management and distortion, it can be easy to think that what’s happening will continue indefinitely. However a recent CNBC report highlighting investor withdrawals from U.S. equity funds during last month’s chaotic market action demonstrates just how quickly sentiment can change.
According to a CNBC report,”February’s brutally volatile market saw investors flee U.S. stocks in near-record numbers, and they’re only slowly coming back.”
“Funds that focus on domestic equities saw investors withdraw $41.1 billion during the month, according to data from TrimTabs, which said it was the third-most in the market data firm’s records. Global funds went in the other direction, attracting $17.9 billion even though stock markets abroad fared even worse than in the U.S.
The flight came during a month when major averages swooned into correction territory — a 10 percent loss — amid fears that inflation was about to spike and lead to rapid policy tightening from the Fed, and as traders using ETFs to bet against volatility suffered major losses. The Dow industrials fell 4 percent during the month, which followed a January that featured the fastest start ever for the market.”
Given the incredible distortion caused by the past decade of Federal Reserve policy, this type of environment is unfortunately what should be expected. Unprecedented amounts of newly created credit has led to fragile markets, that many investors are happy with while the gains continue, yet quick to exit when the warning signs appear. Especially in light of the short-term trading mentality that has consumed the markets.
So if this is what happens when the 10-year U.S. treasury yield nears 3%, just imagine what the reaction would be like should rates continue to rise. Because as jarring as the recent stock declines may have seemed, what occurred in the past month is still just the tip of the iceberg to what ultimately needs to be resolved.
Of course considering where some of that money might be be reallocated to begins to become quite interesting. Because while there are fundamentals, and the way that prices theoretically should move, ultimately it’s when the money starts to flow and gets reallocated that prices finally start to catch up.
Given that the Fed continues to talk about raising interest rates, while the treasury continues to provide no reason for investors to demand more paper, at the present moment there’s every reason to believe the trends witnessed over the past month will continue. Should that occur as expected, that introduces the very real possibility that more money will continue to flow out of stocks.
So where will that money end up?
Typically a lot of the money would flow into so-called safe-haven assets like U.S. treasuries and dollars. Yet if the stock market is declining because rates are rising (meaning the bond market is also declining), the incentive to purchase U.S. assets is diminished.
Which is not to say we won’t hear reports of investors moving into these traditional U.S. havens while labeling it a flight to quality. Yet the amount of investors who are finding the fiscal issues of the U.S. more and more difficult to ignore continues to grow.
So if the major asset classes are all getting simultaneously pummeled, it would seemingly be logical that some portion of that money would consider precious metals as an excellent alternative. And especially in the silver market, because it’s so small compared to the stock or bond market, it doesn’t take an overwhelmingly large amount of capital inflows (at least by Wall Street standards) to make an impact. And as the trading action of the past month has shown, in today’s markets sentiment can change rather quickly.
Which perhaps might not help us know the exact timing of the bigger moves. Yet by studying and understanding what has just occurred, while keeping in mind that the fundamentals have not changed, you can position yourself to be prepared for the market resolution that must eventually occur.
Remember that if you realized in 2005 that there was a bubble in the housing market, you weren’t incorrect, but rather just early. The parallels to the current market dynamics are stunning, and factoring in how money might be reallocated in the future gives you the power to turn what will catch most off-guard into a great source of financial opportunity.
