Tag: S&P 500

Gold Hits High, Stocks Struggle

On Monday, gold rallied to a 1-month high, finishing above $1,254. On the other side, stocks slid to their worst day in a long while, adding fuel to the speculation that the market is due for a correction. According to gold supporters and experts, a correction in the equities market could be a big boost to gold bullion.

Atlanta Federal Reserve Chief, Dennis Lockhart, recently announced his support for further cuts to the Federal stimulus plan (Quantitative Easing or QE). Even though he does back additional efforts to ease up on the easing, he admitted that the state of employment and inflation are not good. The Federal Reserve has stated that both are key measurements being used to determine when to further reduce the bond-buying program. These remarks resonated with stock market investors, however, and were a big reason for the dip.

The biggest scare of the day came from Goldman Sachs, which released a statement warning of an impending stock market correction. According to article released by CNBC, Goldman analysts have stated that, “A stock market correction is approaching the level of near certainty as Wall Street faces a major paradigm shift in how to achieve price gains.” Goldman’s strategists went on to say that the valuation of the S&P 500 is “lofty by almost any measure” and they attached a 67 percent probability to the chance that the market would fall by 10 percent or more.

The spreading fear of a correction has gold prices up 4 percent on the year and silver prices up 1.2%. Precious metals, especially gold, are typically a recommended hedge against inflation and stock market dips. As usual, a focus on portfolio diversification and asset allocation is crucial in order to stay afloat during volatile economic times.

Wells Fargo Issues Warning That Stocks About To Plunge

S&P 500 Bubble?

Amidst all the excitement over the Federal Reserve announcing they will be continuing the bond-buying program and the subsequent stock market rally, Wells Fargo strategist Gina Martin Adams has been reiterating her view that the stock market is due for a major correction.

Adams told Futures Now, “Our target is based on fundamentals. We’re basing our target on typical valuation measures, given the level of interest rates and also on earnings forecasts. And that’s why our target is relatively low.”

The “target” she is referring to is her bearish estimate that the S&P 500 index will finish the year at 1,440. This would be a 15% drop from Wednesday’s 1,702 level. The fact that she is still backing this timeframe means that this drop will happen over the next three months. This should make many investors reevaluate their portfolios, which, for most, have become over weighted with equities due to the struggling bond market.

“It’s all about emotion at this point. The entirety of the S&P 500’s increase this year has come via the multiple,” Adams said. “It’s been simply through the amount that investors are willing to bid up the value of the future earnings stream.”

As interest rates start to rise, the multiple will decrease. In fact, Treasury yields have already begun to rise, but stocks are usually slow to react. “Simply the fact that we moved from 1.6 [percent] on the 10-year Treasury rate to now the 2.7 [percent] range is a potential tremendous shock over the next six months,” Adams warns.

As the market continues to climb, the number of concerns about a correction should also increase. With the bond market showing few signs of recovery, there are only a few areas that investors can turn to protect themselves against a market decline and hedge against inflation. The most obvious area of focus is the physical gold market.

Gold is traditionally strong in September and at the end of the year due to the wedding and festival season in India. China also continues to gobble up physical gold, keeping the demand high. The yellow precious metal can also be used as a hedge against inflation as its value tends to increase as the value of the U.S. dollar decreases. With the Fed continuing to pump money into circulation, the dollar should continue to lose value. The uncertainty in the Middle East also weighs heavily on the mind of investors concerned that a conflict could cause a stock market drop as well.

With dire technical warnings, threats of war, and increased demand from Asia, physical gold and silver coins are looking more and more like a safe-haven at its current price point.

Image Credit: theatlanticwire.com

Is The Next Great Bubble About To Burst?

S&P 500 Bubble? Since the collapse of the financial markets in 2008, Americans are wary of yet another bubble to burst and disrupt the barely recovering economy. Experts have been warning the public about possible impending bubbles with regard to ballooning student loan debt and soaring real estate prices. However, even more worrisome is the unabated rise of stock prices as the stock market is an integral part of the economy.

About 2 weeks ago, news about inflated stock prices alarmed market observers on Wall Street. The stock prices of Standard & Poor’s 500 Index (SPX) have climbed 146 percent since it hit rock bottom in 2009. In fact, the price gains of the stocks in the S&P 500 are outperforming the profits by the fastest rate in 14 years. While combined profit at S&P 500 companies rose by 37 percent in 2010, 19 percent in 2011 and then slowed to 2.3 percent last year, earnings increased 3.6 percent and 3.7 percent in the first and second quarters.

However, corporate earnings have to accelerate to validate the surge in equities, especially as the central bank begins to reduce its monetary stimulus (Fed Chairman Ben S. Bernanke announced in May that the central bank would reduce its bind buying this year). Companies like Caterpillar Inc. and Danaher corp. predict slower profit growth to slow down significantly. If earnings fail to keep up with price signals, the rally could be in its final stages.

In fact, the 53-month gain has surpassed the average length of bull markets since 1946 by about four months. Moreover, Bloomberg reports that “[t]he benchmark gauge for U.S. equities has risen 14 percent relative to income over the past 12 months to 16 times earning, according to data compiled by Bloomberg.” The last time this happened was in 1999 during the technology bubble, when valuations ascended 19 percent in a year to a 30 times profit, just before the S&P 500 index started its 49 percent fall.

This is indeed concerning as the S&P 500 comprises the most significant corporations in America and is considered a staple in even the most conservative portfolios. When investors flee emerging markets in an unstable economy, the S&P 500 becomes a popular and safe destination for their retirement money. But if the stock market crashes again, these assets will essentially evaporate.

What can you do to protect yourself? Make sure to invest your retirement money in a safe asset that is relatively immune to market fluctuations, protected from inflation, corporate profits, and worthwhile at all times. Precious metals like gold and silver may protect your retirement money from a looming crash; moreover, if the stock market collapses, as many financial experts fear, gold and silver prices will most likely see an “explosion” – Ron Paul in price.

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