Why Gold and Stocks Are Tanking Today

Both blue-chip stocks and gold are lower today on the heels of worse-than-expected economic figures both at home and abroad. With an hour and a half left in the trading session, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is off by a whopping 185 points, or 1.25%, while gold is on track for its worst single-day decline in decades.

The primary concern among analysts and traders is evidence that China's growth rate is waning. The world's second-largest economy grew by 7.7% in the first quarter of the year, down from 7.9% in the last three months of 2012 and below the 8% rate expected by economists. According to JPMorgan's chief China economist, quoted in The Wall Street Journal: "The slowdown in the first quarter is very remarkable. The weakness is quite broad-based on the domestic front."

Meanwhile, data released by the Federal Reserve Bank of New York suggests that things aren't going well on the U.S. economic front, either. The bank's Empire State Index, which measures manufacturing activity in the eponymous region, fell to 3.1 points in April, down from 9.2 in March -- anything above zero nevertheless suggests expansion. Economists surveyed by MarketWatch.com had predicted a reading of 7.8.

In terms of individual companies, Citigroup (NYSE: C  ) reported much-improved first-quarter earnings this morning. The nation's third-largest bank by assets earned an impressive $3.8 billion in the three months ended March 31. That equated to a 30% year-over-year improvement. And perhaps most impressive was its progress on the top line, where competitors like JPMorgan and Wells Fargo struggled over the same time period.

Given the news out of China, it should be no surprise that the Dow's worst-performing stock this afternoon is Caterpillar (NYSE: CAT  ) . The heavy-machinery company looks to China for a considerable portion of sales and depends on global growth more generally to fuel demand for its products. In addition, as my colleague Dan Caplinger noted earlier today, the fall in gold prices could also have a negative impact on mining activity, an important source of demand for Caterpillar equipment.

Alternatively, the Dow's best-performing stock is Wal-Mart (NYSE: WMT  ) , up a meager 0.1% on a day when most of the index is swimming in red. Given its focus on low prices, the world's largest retailer has a tendency to move in a countercyclical manner. Fellow Fool Morgan Housel discussed this in the middle of February:

Wal-Mart is a peculiar company in that its selling point -- insanely low prices -- gains value when the economy is weak. Families who in normal times shop where it's most convenient flock to Wal-Mart when the economy sours. As the economy was falling apart in early 2009, CEO Mike Duke noted on a conference call: "Our company is stronger than ever because we deliver price leadership and value and help our customers save money so they can live better."

With this in mind, it makes sense that Wal-Mart is bucking the market's downward trend today.

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  • Report this Comment On April 15, 2013, at 3:08 PM, mdk0611 wrote:

    I think you also need to take into account a squeeze on leveraged holders of gold.

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