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Stocks are Falling As Investors Worry About the Global Economy

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Stocks are Falling As Investors Worry About the Global Economy

Investors are feeling nervous about the central bank meetings between the Bank of Japan, Bank of England, and the Federal Reserve. 

The stock market is showing investors’ anxiety, dropping significantly, while government bond yields fall as well. 

Even more foreboding, the yen gained in strength, demonstrating the extent of worries about central bank policies and the possibility of the U.K. leaving the European Union.

The Big Benchmarks Are Down

The following graph represents the Dow Jones Industrial Average from June 7th to June 13th:

P3.1

As the graph demonstrates, the Dow Jones declined for three days in a row, for a 5-day change of -1.05%.

On that Monday alone, the Dow Jones Industrial Average dropped 0.7%, or 132.86 points, to 17732.48.  

At the same time, the S&P 500 fell 0.8%—17.01 points—to 2079.06. 

The Nasdaq Composite declined 0.9%, or 46.11 points, to 4848.44.

Individual Stocks, Naturally, Had Mixed Results

Of the Dow Industrials, Microsoft took the greatest hit, losing 2.6%—or $1.34—to $50.14. 

This came on the heels of the company agreeing to buy LinkedIn, which headed in the opposite direction, skyrocketing 47% or $61.13 to land at $192.21.

In the S&P 500, technology stocks were some of the hardest hit, dropping 1.1%. 

Hewlett-Packard Enterprise, in particular, fell 2.7%—52 cents—to land at $18.60.

Clearly, this is not a good time to be a tech company.

These Domestic Losses Came on the Heels of Declines in Asia and Europe

As the following graph shows, the Hong Kong Hang Seng Index declined for several days:

P3.2

The Index landed down 2.5%, and the Shanghai Composite dropped 3.2%.

European Worries About the U.K. Possibly Leaving the EU Are Clearly Reflected in their Stocks

The Stoxx Europe 600 also dropped a full 1.8%, the lowest it has closed since February. 

Investors are worried that the U.K.’s June 23rd referendum to leave the European Union may pass, possibly throwing markets into chaos. 

John DeClue, of the Private Client Reserve at U.S. Bank, stresses the importance of the European Union and the disruptive influence that the U.K. leaving it would have.

Meanwhile, 10-year bond yields in the U.K., Japan, and Switzerland fell to record lows on that Monday.

American Bonds Were Affected Too

The yield on the 10-year Treasury note crashed from 1.639% to 1.616% on that Friday, the lowest since December of 2012.

Negative Yields Have Been Changing the Landscape of How People Invest

Many investors are being driven away from negative-yielding bonds in Japan and Europe, going instead to buy the relatively high-yield U.S. Treasury bonds or high-dividend stocks like utility shares, which are up about 16% in 2016.

David Rosenberg of Gluskin Sheff & Associates Inc points out the effect that negative yields are having on the U.S. economy, saying that the S&P 500 has broken records in terms of returns because people seeking actual profit are relying on the reinvested dividend to provide.

Three Major Central Banks Have Meetings This Week

The Fed, The Bank of Japan, and the Bank of England all have meetings, which carry the possibility of adjusted interest rates, which are making a lot of people very nervous. 

This may, in fact, have worsened the selloff that has been going on since the week before.

The VIX is Up, and Considerably

  • The CBOE Volatility Index, otherwise known as VIX, rose 23% to 20.97, well on its way to closing at its highest since February.
  • The VIX is based on the cost of options that investors buy when they suspect that the S&P 500 is going to decline. Hence, it’s being known as the fear gauge.
  • The VIX had gone up 43% in two days, representing the greatest gain of its kind since August of 2015.

 

Gold Is Also Up

P3.3

Given the weaker dollar and the higher fear gauge, people are going for gold as a haven

The metal rose 0.9% to $1,284.40 an ounce, having risen a total of 21% in 2016. 

As the graph shows, it continues to rise.

Suzanne Hutchins of Newton Investment Management is confident in gold, pointing out that you can’t print it the way you can money. 

She also carries a lot of it in her portfolio.

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S&P 500 Stocks Varied Wildly That Week, With the Leaders Being:

  • Symantec Corp (SYMC)
  • Walgreens Boots Alliance Inc. (WBA)
  • Devon Energy Corp. (DVN)
  • Transocean Ltd. (RIG)
  • Iron Mountain Inc. (IRM).

For Losses, the Worst Were:

  • Marathon Petroleum Corp. (MPC)
  • Valero Energy Corp. (VLO)
  • United Continental Holdings Inc. (UAL)
  • Signet Jewelers Ltd. (SIG)
  • American Airlines Group Inc. (AAL)

Meanwhile, Japan Had Mixed News, Perhaps the Most Troublesome Being the Yen

Japan’s Nikkei Stock Average plummeted 3.5%, but the yen skyrocketed to levels it hasn’t reached since 2013. 

The yen is notorious for gaining when the market is under pressure and now is no exception.

The dollar is down against the yen, and the British pound is down against the dollar. 

The yen has gained strength to the tune of about 13% this year. 

Representatives of the Bank of Tokyo-Mitsubishi say this could mean that the Japanese central bank makes further monetary adjustments.

Lastly, Oil Too is Feeling the Anxiety

U.S. crude oil was down to $48.88 after falling 0.4%.

Conclusion

It would seem that no part of the global market remains unaffected by investors’ current anxiety. 

What the U.K. chooses to do regarding the European Union could have a massively destabilizing effect, and what the banks choose to do about interest rates could have serious consequences for the entire world. 

Investors are right to be more than a little nervous.

Even the prospect of these changes have stocks tanking left and right, and the unusually strong yen is a reliable indicator that there is pressure in the market, as is the unusually strong American CBOE VIX. 

It would seem that the whole world is running scared. 

However, only time will tell whether these fears are groundless, or an eventuality that will come to pass.

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