Week in Review: Market Rebukes Yellen, Bonds & Gold Soar while Stocks Fall


More investors are running away from stocks and seeking safe havens as job data weakens, signs of a recession intensify, and Janet Yellen reverses her bullish position on the U.S. economy.  Gold hit its 1-year high on Thursday while U.S. Treasury prices continued to soar as investors crowded into both assets to escape an increasingly volatile stock market.

The Standard and Poor’s 500 and Dow Jones Industrial fell again and now has a 10% loss from the beginning of 2015 after stocks around the world sold off in a violent day of trading. In Europe, markets fell 3.7% because of a drop over 5% in Italy, a 2.7% fall in German, and approximately 4% losses in France and Spain. In Asia, the Hang Seng in Hong Kong lost almost 4% as well, after Japan’s Nikkei 225 index lost over 5% on Wednesday and remains down over 17% from the beginning of 2016.

The losses in Japan and Germany are surprising investment banks, which have made strong recommendations to buy stocks in both markets. The European Central Bank and Bank of Japan’s combined quantitative easing purchases, which total nearly $3 trillion combined, were supposed to lift stock prices as the programs continued. Both central banks are expected to increase their QE programs this year.  However, those markets are already deeply in a bear market with more losses expected as analysts warn that economic data is worsening around the globe driven in part by a slowdown in China.

Weakness in America

Weak economic data also plagued the United States this week.

After the Bureau of Economic Analysis reported last week that GDP growth was slowing to 0.7% in the 4th quarter of 2015, the Bureau of Labor Statistics announced that nonfarm payrolls rose just 151,000 in January, far below the 190,000 expected by economists. The labor force participation rate also remained stagnant at 62.7%, the lowest rate since the 1970s and far below the historic average.

Although companies are not hiring at a strong pace, they are demanding more employees. The Department of Labor said 5.6 million job openings were available in December, far above 5.4 million expectations.

Some economists warn the combined weak pace of hiring and higher pace of job advertisements indicates a deflationary trend in the labor market. The theory suggests that companies may be looking to cut costs by replacing higher paid older workers with cheaper newer ones, while demanding more skills and qualifications despite the lower pay.  If true, this could worsen aggregate salaries in the United States, which in turn would drag down personal consumption expenditures, GDP growth, and inflation. All of these indicators have seen a significant decline in recent months.

A decline in spending and consumption was also hinted at by new data from the Census Bureau released this week. Wholesale trade fell 0.3% in December from the prior month, falling to $440 billion in total.

Fed Addresses Volatility

Seeing this weakness, Janet Yellen acknowledged the stock market volatility and hinted at a softer monetary policy as a result.  Nonetheless, Yellen defended her prior bullish statement on the economy when speaking to Congress yesterday, noting, “ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending."

Markets remain unconvinced that inflation and economic growth are materializing, as the 10-year Treasury fell as low as 1.53% on Thursday, tying the lowest rate in history which was seen in the summer of 2012. Meanwhile, gold rose to $1,236 per ounce, reaching its highest point in the last year.