Stocks: The Liquidity Rally Just Died

If anyone had any doubt that this year's rally was partially (or, perhaps, even heavily) fueled by the market's happy hope of eternal Fed liquidity, the market's reaction to Ben Bernanke's announcement on Wednesday afternoon that the central bank expects to slow its bond buying this year should erase any and all of them. Today was a big day for the markets – all of them:

  • The S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) finished the day down 2.5% and 2.3%, respectively. The S&P 500 is now off its May 21 high by roughly 5%. It's worth noting that the market achieved that high one day prior to the notion of a 2013 tapering in QE3 first surfacing from the Fed.
  • Government bond prices also fell. According to Tradeweb, the yield on the 10-year Treasury note hit 2.425% this afternoon – its highest level in nearly two years. On May 1, the same yield was 1.63%.
  • Let's be clear: Yesterday, the Fed rang the death knell for the long gold trade. As investors come to terms with the fact that the economy and financial markets are normalizing, gold's appeal as a safe haven diminishes. Furthermore, as interest rates rise (see above), so, too, does the opportunity cost of owning gold, which offers no yield. The price of gold fell today, but it's the magnitude of the decline – 5.8% -- which is really worth noting, as the yellow metal closed below $1,300 for the first time since Sep. 2010. Shareholders in the SPDR Gold Shares ETF (NYSEMKT: GLD  ) have suffered a 24% loss year to date, which is pretty impressive for a "store of value."
  • Finally, underscoring investors' nervousness, the CBOE Volatility Index (VIX) (VOLATILITYINDICES: ^VIX  )  shot up 23%, to close above 20 for the first time this year. The last time it closed higher was last Dec. 28, when the market was wrestling with fear of the the "fiscal cliff." (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Faced with volatility, jitters are normal, but there is no cause for panic -- this process looks very healthy to me. The stock market is down just 5% from its all-time (nominal) high, and that mark always looked a bit frothy, anyway. There was no reason to believe that the Fed's monetary largesse would last forever, even if the market wanted to behave on that basis. We're on the path to normalization, and fundamentals are reasserting themselves; surely, no genuine investor could have cause for complaint there.

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  • Report this Comment On June 21, 2013, at 1:54 AM, awallejr wrote:

    Except you continue to ignore the real reason to hold gold which I have argued over and over. It is about insurance. The cheaper the "policy" the better.

    The Fed rang no death knell and it is ridiculous to argue otherwise. You simply don't understand the purpose of owning gold. It is NOT an investment. It is as I have argued over an over, insurance against chaos and future inflation,

    Since I have no intentions of ever SELLING, it simply becomes a question of COST. So bring the price down in the short run. Fine by me.

  • Report this Comment On June 21, 2013, at 8:10 AM, TMFAleph1 wrote:

    Don't extrapolate your rationale for owning gold to the entire market. The insurance function will not support a gold price of $1,400, much less $2,000.

  • Report this Comment On June 21, 2013, at 9:46 AM, awallejr wrote:

    Time tells on that. I am sure you would love to see gold selling for $500 an ounce (ironically I would too but for different reasons) so you can come here and say "I told you so." Your gold argument here is no different than those who were arguing "Dow 2000" back in 2009. It is nonsense Alex.

  • Report this Comment On June 21, 2013, at 10:10 AM, TMFAleph1 wrote:

    My position on gold has nothing whatsoever to do with those who were arguing for Dow 2,000 back in 2009, but you're fortunate to be happy owning gold irrespective of its price. There is no risk of being disappointed with an approach like that.

  • Report this Comment On June 21, 2013, at 4:43 PM, awallejr wrote:

    Sure it is. When you write posts saying gold will fall to $500 (which you have) that is no different than those who were saying back in early 2009 that the Dow will drop to 2000.

    And yet you still don't get it about gold. I am not "happy owning gold irrespective of its price." That is just silly. Are you "happy owning life insurance or disability insurance irrespective of cost?" There is no emotion by me here.

    I hope I never have to "use" any gold I hold because that means bad things have happened.

  • Report this Comment On June 21, 2013, at 5:46 PM, TMFAleph1 wrote:

    I never wrote that gold will fall to $500; I did write that gold could ultimately fall to $500. It's an important distinction; only lunatics or novices think they know what will happen in the financial markets.

  • Report this Comment On June 22, 2013, at 1:57 AM, awallejr wrote:

    Guess you forgot about this blog of yours: http://caps.fool.com/Blogs/gold-could-drop-to-500/827831

    That was a prognostication. You make them, you accept the end results. You listened to Peter Schiff in 2008 you made money, you listened to him EVERY year since you got crushed. You listened to me in 2008 you got crushed. You listened to me EVERY year since you made money.

    Stop thinking GOLD/SILVER from an INVESTORS' point of view. It is a unique ASSET CLASS.

    Ever see the movie "Schindler's List"? I am sure you have. But remember the REALISTIC scene where Schindler offered the camp commandant a bunch of DIAMONDS for the "cargo"? That HAPPENED. Can it HAPPEN again? Who knows, time will tell. THAT is the point of owning gold/silver.

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