Will Bad News Continue to Be Good News for US Equities?

Andy Corbley

Read Time:3 Minute, 30 Second

For the majority of Joe Biden’s Presidency, interest rates remained higher than historically normal. This had the funny effect of prompting green days in the stock market anytime there was poor economic news, such as higher-than-expected job losses, or lower-than-expected consumer sentiment.

The logic was that bad news would force the recalcitrant Federal Reserve Chairman Jerome Powell to lower the interest rates he and the FOMC kept so high at 4.5 – 4.75% which would stimulate the economy and bring back conditions where Wall Street’s growth-happy names could borrow cheaply to expand as they did throughout the 2010s.

Traders and investors will be hoping for a similar reaction when they get this week’s releases of January’s nonfarm payroll report, Consumer Price Index (CPI) numbers, and initial jobless claims, a spate of data that would strongly influence the Fed in its interest rate decision in normal circumstances. Reuters claims that markets are already pricing in two 0.25% reductions in the interest rate, which at the current price inflation level would render them 0%.

Bad news, the markets might reason, could accelerate the arrival of those cuts, or prompt additional cuts in the future, therefore creating the environments that the growth-weighted indices have historically thrived under.

Gold prices climbed back above $5,000 during Monday’s trading in Asia, over a weekend in which Japanese Prime Minister Sanae Takaichi’s party won big in a lower house election. The results saw the Nikkei 225 gain 3.89%, which also corresponded with a 0.3% fall in the US dollar.

With the Bank of Japan bond yields falling back from their record-highs in mid-January, and the yen gaining sharply from an 18-month low against the dollar in the face of a Liberal Democratic Party majority in Tokyo that may be able to avoid making compromises on its economic policy, the Japanese market has taken an impressive turn towards calmer waters.

With such a demand for gold as a safe haven asset, it’s expected that lower interest rates at the Fed will favor both equities and gold, as cheaper borrowing will allow companies to access to more credit to expand, while also lowering Treasury note yields and making the non-interest-bearing asset gold carry a lower-than-normal opportunity cost; although perceived higher gains in the former might attract people out of the latter.

While a hair-raising, January 30th sell-off in precious metals saw silver fall from a high above $120/oz to $70.00, gold has quickly regained its momentum, backed by demands for a safe haven asset and a 15th consecutive month of central bank purchases from China. The GDX, the gold mining majors index by Van Eck, was up 1.48% in the US during pre-market trading on Monday.

Despite the enduring demand for gold, the GDX, which tracks closely with the price of gold but pays out a distribution, has only had positive inflows of capital in the last 5 days. The last 1 month, 3 month, 6 month, and 1-year periods have all been net-negative. It shows that buyers who haven’t been scared off by the January fall from almost $5,500/oz to less than $4,600/oz were taking advantage of the lower prices to increase their positions or open new ones, expecting new highs later this month or year.

Stateside, conditions that would cause equities to flourish have typically been at the expense of metals and the miners that produce them, but perhaps owing to the drama of gold’s month-over-month march to $5,000 and beyond, the inescapable net effect that will have on the balance sheets of companies like those in the GDX, and the increasing susceptibility to currency and bond markets around the world from global debt burdens, the metal and the miners seem more resistant than in previous bull markets. WaL