• The stock market dropped over 500 on news of rising inflation
• Fears of higher-for-longer interest rates fueled the massive sell off
• To hedge against stock market volatility, investigate the benefits of a Gold IRA

Stocks Crash on Inflation News

A volatile stock market plummeted more than 500 points after the release of the most recent inflation data. Coming in higher than expected, the elevated Consumer Price Index (CPI) created fears of higher-for-longer interest rates. The extreme uncertainty haunting the market emphasized the need for safe haven assets to protect portfolio value.

The Dow Jones Industrial Average fell 525 points on the CPI news. It was the largest single-day drop since March 2023. The benchmark erased almost half its gains for 2024. The blue chip index nosedived more than 700 points at its session lows. Meanwhile, the S&P 500 and the Nasdaq also fell. All 11 S&P sectors ended in the red, with rate-sensitive names falling the most.

The selloff comes after the Dow hit a record high close and the S&P 500 closed above 5,000 for the first time. Investors were riding a crest of enthusiasm based on signals that inflation was under control and interest rate cuts were on the horizon. That optimism crashed along with the market.¹

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State of Inflation

The latest Consumer Price Index report showed prices rose 3.1% for the 12 months ending in January. CPI rose on a monthly basis as well. Core inflation has been even more stubborn as housing costs have stayed higher than anticipated.³

Both inflation measures were hotter than expected. Economists thought inflation would slow to 2.9%. Shelter prices accounted for much of the rise. It contributed more than two-thirds of the headline increase. On a 12-month basis, shelter rose 6%.⁴

Food prices were also higher. But a drop in fuel costs is what caused headline inflation to be 3.1% while core inflation is up at 3.9%. With the Middle East so volatile right now, fuel could send inflation lurching back up on a moment’s notice. Inflation-adjusted hourly earnings increased .3% for the month. But, when adjusted for the decline in the average workweek, real weekly earnings actually fell .3%.⁵

The Fed vs Wall Street

Stock prices rose on expectations of a rate cut as soon as May. Now traders don’t foresee a first rate cut until June or July.

“The stock market can’t keep rallying if rates are going to be higher-for-longer — especially if the assumption that the Fed is completely done raising rates is incorrect,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a Tuesday note.⁶

Wall Street had priced in about six rate cuts for 2024. They interpreted Fed signals that rates would start coming down from 22-year highs. Atlanta Fed President Raphael Bostic squashed Wall Street’s optimism by saying he doesn’t see the Fed cutting rates until the summer. The Fed wants to avoid any upticks in inflation. They believe cutting too early could raise that risk.

“We continue to expect the FOMC to leave the Fed funds rate unchanged at the March meeting and to begin the easing cycle in May,” said Jan Hatzius, chief economist at Goldman Sachs.
While over 91% of market participants agree with Hatzius, the majority, 62%, don’t expect any move at the May meeting, according to the CME’s Fed Watch Tool. Expectations for June are even more iffy, with just 24% expecting a cut.⁷

The Fed is, and has always been, focused on inflation. They explicitly have stated that rates won’t come down until there is clear data that inflation is on a definite trajectory to 2%. With continued growth and a strong labor market, the Fed does not feel the need to worry about high rates crushing growth.

But an overeager Wall Street only seemed to be hearing what they wanted to hear.

“The much-anticipated CPI report is a disappointment for those who expected inflation to edge lower allowing the Fed to begin easing rates sooner rather than later,” said Quincy Krosby, chief global strategist at LPL Financial. “Across the board numbers were hotter than expected making certain that the Fed will need more data before initiating a rate cutting cycle.”⁸

Conclusion

Wall Street may be setting themselves up for a bigger fall. A Bank of America survey found investors are cutting cash holdings and plowing it into stocks. Global stock allocation is at a two-year high. It seems as if investors are experiencing FOMO on the surge of the ‘Magnificent 7’ tech stocks. But they are building on uncertain foundations. Even a slight uptick in inflation sent the market plummeting. Overvalued stocks could fall even further with just a hint of negative news from the Fed.

Therefore, now is the time to look for assets that can protect the value of your portfolio, such as physical precious metals. Even with the prospect of higher-for-longer interest rates, analysts point out that gold is staying in a range of approximately $2,000 and $2,100. Worsening economic, political, or financial issues could take gold over $2,100. When placed within a Gold IRA, you can obtain wealth protection and tax advantages. To learn more before stocks dive again, call us today at 800-462-0071.⁹

 

Notes:
1. https://www.cnn.com/2024/02/13/investing/stocks-tuesday-january-cpi/index.html
2.https://www.google.com/url?sa=i&url=https%3A%2F%2Fwww.bloomberg.com%2Fnews%2Farticles%2F2024-02-12%2Fstock-market-today-dow-s-p-live-updates&psig=AOvVaw16g_tClW31nt2C9iST6phQ&ust=1708032467742000&source=images&cd=vfe&opi=89978449&ved=0CBYQjhxqFwoTCJjl1friq4QDFQAAAAAdAAAAABAE
3. https://www.cnn.com/2024/02/13/investing/stocks-tuesday-january-cpi/index.html
4. https://www.cnbc.com/2024/02/13/cpi-inflation-january-2024-consumer-prices-rose-0point3percent-in-january-more-than-expected-as-the-annual-rate-moved-to-3point1percent.html
5. https://www.cnbc.com/2024/02/13/cpi-inflation-january-2024-consumer-prices-rose-0point3percent-in-january-more-than-expected-as-the-annual-rate-moved-to-3point1percent.html
6. https://www.thestreet.com/investing/stocks/did-inflation-deliver-knockout-blow-in-stocks-fight-the-fed-battle
7. https://www.foxbusiness.com/markets/dow-plunges-worst-day-2024
8. https://www.cnbc.com/2024/02/13/cpi-inflation-january-2024-consumer-prices-rose-0point3percent-in-january-more-than-expected-as-the-annual-rate-moved-to-3point1percent.html
9. https://www.kitco.com/news/article/2024-02-13/higher-longer-interest-rates-mean-lower-longer-gold-and-silver-prices-cpm

• New York Community Bancorp shares plummeted due to devalued assets and tighter regulations
• The sinking regional bank sparked fears of a sector wide banking crisis
• A Gold IRA can insulate portfolios from the impact of a collapsing banking system

Banking Crisis Blowing Back Up

It has been one year since the banking crisis resulted in the second and third largest bank collapses in US history. And now a new troubled regional lender, New York Community Bancorp (NYCB) is stoking fears that the simmering banking crisis is about to reignite.

New York Community Bancorp stock plummeted after releasing a terrible earnings report. The report showed massive, unexpected losses on commercial real estate loans. The bank revealed a fourth quarter loss of $252 million instead of a third quarter gain of $207 million. In response, the bank slashed its dividend by 70% and was forced to stash a half billion in cash away to protect against future losses, plus $185 million in net charge-offs. Their shares have lost almost half their value in a week, dropping 44.6%.¹

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Even worse, this came as a shock because the bank had not prepared markets for the bad news. Moody’s has since put its ratings of NYCB under review. The bank shares can now be downgraded into “junk” territory.

The fall of NYBC ties directly back to the earlier stage in the banking crisis. NYBC ballooned in size last year after taking over the assets of the fallen Signature Valley Bank. Not only did NYCB trap themselves with the flailing SVB assets, but the acquisition also pushed them above the $100 billion asset mark. That forced them into tighter government standards that were imposed to prevent another round of regional bank collapses. NYBC had to devote more funds to make sure they could stay liquid in case of a crisis.

Fear of the Crisis Spreading

Fears of contagion amongst regional banks grew. Regional banks are overleveraged with loans to a desperately struggling commercial real estate sector. The average regional bank stock has lost 10% over the past week.

Other banks are drawing scrutiny. M&T bank has similar size and assets as NYBC. Big banks have been bracing against real estate losses by setting money aside for months. Overseas banks are not insulated from the panic. Azora Bank of Japan saw shares drop 20% due to its portfolio of US office loans. It could have fallen further if there wasn’t a maximum drop allowed on the Japanese market. Deutsche Bank had to increase its loss provisions for its US commercial loans nearly fivefold.

Fed Chair Jerome Powell described the situation as a “sizable problem.” The rapid increase in interest rates is what doomed Signature Valley Bank. High rates combined with low valuations to put commercial real estate holdings underwater. But there was a secondary effect. Banks had to raise interest rates to compete with the government for depositors. This eroded their net interest income – the difference between what lenders earn on loans and pay on deposits.³

The Federal Reserve put a lid on the earlier phase of the banking crisis by printing money and throwing it at the banks. Their “Bank Term Funding Program” with $25 billion in new money paused the crisis without solving the underlying problems.

Bank Runs

Last year’s banking crisis was made worse as fears of a bank run grew. Customers withdrew $42 billion in a single day from Silicon Valley Bank. It was left with $1 billion in negative cash balance. The staggering withdrawals unfolded at a speed enabled by digital banking and were likely fueled in part by viral panic spreading on social media platforms and, reportedly, in private chat groups.⁴

Regulators say a run is unlikely. But it is not impossible. Like they say, a flood always begins with a single drop of rain. With banks required to only keep a small fraction of customer deposits on hand, another run could be disastrous.

And with $1.5 trillion of commercial real estate loans hovering near default, there is reason to believe a nationwide banking crisis could flare up to epic proportions. A new report from the National Bureau of Economic Research indicates that nearly half of all banks now risk default. Even a 10% default rate would cost commercial banks $80 billion.⁵

The floodwaters could break as soon as March 11. On that date, the Fed’s emergency bank funding program will shut down for good. Without a government bailout waiting in the wings, the country may be stricken by a full-blown banking crisis that affects every sector of the economy and sinks the stock market.

The government recognizes the danger even if they aren’t prepared to handle it. The Financial Stability Oversight Council, of which Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and US Securities and Exchange Commission Chair Gary Gensler are members, released a report last December that cited commercial real estate as a major potential financial risk.

“As losses from a [commercial real estate] loan portfolio accumulate, they can spill over into the broader financial system,” they wrote. “Sales of financially distressed properties can reduce market values of nearby properties, lead to a broader downward CRE valuation spiral, and even reduce municipalities’ property tax revenues.”⁶

Conclusion

The only people profiting from the failing banks are the short sellers who made over $685 million in paper profits. And that is on top of hedge funds clearing unrealized profits of $7.25 billion after the March 2023 bank failures.⁷ If you aren’t in that elite club of investors, then you need to take precautions to protect the value of your portfolio. With no counterparty risk, a Gold IRA from American Hartford Gold can insulate your portfolio from a collapsing banking system. Contact us today at 800-462-0071 to learn more.

Notes:
1. https://www.cnn.com/2024/02/06/investing/premarket-stocks-trading/index.html
2.. https://www.nytimes.com/2024/02/06/business/banks-real-estate-fears.html
3. https://www.nytimes.com/2024/02/06/business/banks-real-estate-fears.html
4. https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.html
5. https://moneyandmarkets.com/2024-phantom-bank-crisis/
6. https://www.cnn.com/2024/02/06/investing/premarket-stocks-trading/index.html
7. https://www.cnbc.com/2024/02/01/us-regional-banking-shares-tumble-for-second-straight-day.html

• The AI fueled stock boom bears an eerie resemblance to the dot-com bubble of the 90s
• Analysts see the highly concentrated, overinflated tech stocks experiencing a similar bust
• Physical precious metals in a Gold IRA can protect the long-term value of your portfolio from an inevitable crash

The AI Stock Bubble is Set to Burst

AI has sparked a stock market boom that may soon go bust. The ‘Magnificent 7’ tech stocks are lifting the market to new heights. But experts are advising caution as conditions take on an eerie resemblance to the dot-com boom of the 1990s. The “irrational exuberance” overinflating today’s stock prices could be squashed by a sudden crash, massive losses, and a lingering recession.

The stock market has been rising since it bottomed out last October. Tech stocks are leading way, specifically, a group known as the Magnificent 7. This group includes Amazon, Apple, Meta, Alphabet, Tesla, Nvidia and Microsoft. Bank of America has called the AI boom a ‘baby bubble’ with returns on trades rising 200%. The 7 almost singlehandedly lifted the S&P 500 to a 24% gain in 2023. This concentration in the market is nearing its highest level since the dot-com days. There is less diversity of companies leading the market in 2024 than at the peak of the dotcom bubble.¹

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Parallels to the 1990s

Ed Yardeni is a longtime investment strategist and president of Yardeni Research. He said, “Instead of a repeat of the inflationary 1970s or a replay of the productivity-led boom of the 1920s, the current decade has the potential to play out like the tech-led stock market party of the 1990s.”³

The rapid rise of AI chip maker Nvidia looks like the parabolic ascent of Cisco, the maker of equipment for the internet. Cisco’s share price increased 8-fold from 1997 to March 2000. Meanwhile, Nvidia is up 252% with the AI explosion ignited by ChatGPT.⁴

The Fed may inadvertently swell the bubble if they begin cutting interest rates this year. Lower rates could fuel the same “irrational exuberance” that powered the doomed internet bubble. Newly accessible cash would overinflate asset prices. And when valuations ultimately crash back to normal, a recession would most likely ensue.

Jon Wolfenberger is the founder of BullAndBearProfits.com and former investment banker at JP Morgan and Merrill Lynch. He also compares today’s market to the dot-com bubble of the 90s.

“For those of you younger than us who did not live through the Tech Bubble of the late 1990s, you are now living through Tech Bubble 2.0. As a reminder, the NASDAQ fell about 80% when that bubble burst in the mild recession of the early 2000s,” Wolfenbarger said. “Given the fact that stock market valuations are even higher now than they were at the Tech Bubble peak of 2000, we would not be surprised by a similar decline in the coming recession.”⁵

Evidence of a Bubble

There is evidence supporting the idea that there is a bubble. The Shiller price-to-earnings ratio gauges whether the market is overvalued. It is currently at one of its most elevated levels in history. It isn’t as high as it was during the dot-com bubble, but it is higher than it was in 1929.

The concentration of stocks also points to a bubble. The top five stocks make up a higher percentage of the S&P 500 than they did during the dot-com bubble. This concentration drastically increases the vulnerability of the market to a crash if anything happens to those leaders.

Wolfenberger identified several factors pointing to the impending bubble-bursting recession. He pointed to the continuing sharp decline in the number of full-time employees. The drop is quickly resembling the unemployment rate before the recessions of 2001 and 2008. Wolfenberger also cited declining manufacturing data, which also fuels unemployment, and the inverted Treasury yield curve.

Other expert voices are sounding the alarm. Jeremy Grantham, who called the 2000 and 2008 crashes, has said that stocks are in a ‘super bubble.’ Adam Karr is the President of Orbis Investment Management. He issued this warning, “Historically, similar periods have ended badly. Expensive stocks lost 40% of their value following the Japan bubble in the late 1980s and 50% of their value following the dot-com implosion. Investors can look foolish for not owning the winners in the short term—and ‘FOMO’ can be overwhelming. But paying too much for an asset with high expectations can be a recipe for disaster.”⁶

JP Morgan is also advising caution. A team of analysts found that the rising concentration in the stock market has become an important risk that investors should be aware of in 2024. The JP Morgan strategists said the Magnificent 7 are overdue for a period where it lags behind the broader market. They warn clients to expect a drop in the market as a result.

Conclusion

The AI boom driving the market higher is taking on an uncanny resemblance to the dot-com bubble of the 1990s. By the time that bubble finished bursting, stocks had lost $5 trillion in market capitalization since the peak. At its trough on October 9, 2002, the NASDAQ-100 had dropped to 1,114, down 78% from its peak.⁷

It is easy to get caught up in the excitement of quick profits. But the bigger that bubble grows, the harder those stocks will fall. People with a long-term outlook should investigate assets that will weather the inevitable market drop and protect their portfolios from losses. Physical precious metals in a Gold IRA can preserve the value of retirement funds as stocks crash. Contact us today to learn more at 800-462-0071.

Notes:
1. https://www.businessinsider.com/stock-market-crash-tech-bubble-valuations-sp500-nasdaq-recession-wolfenbarger-2024-1
2.https://www.advisorperspectives.com/images/content_image/data/b0/b08eabf2c6dd39ca0601334df3fac807.png
3. https://markets.businessinsider.com/news/stocks/stock-market-outlook-90s-dotcom-crash-tech-bubble-nvidia-yardeni-2024-1
4. https://markets.businessinsider.com/news/stocks/stock-market-outlook-90s-dotcom-crash-tech-bubble-nvidia-yardeni-2024-1
5. https://www.businessinsider.com/stock-market-crash-tech-bubble-valuations-sp500-nasdaq-recession-wolfenbarger-2024-1
6. https://www.businessinsider.com/stock-market-crash-tech-bubble-valuations-sp500-nasdaq-recession-wolfenbarger-2024-1
7. https://en.wikipedia.org/wiki/Dot-com_bubble#:~:text=By%20the%20end%20of%20the,down%2078%25%20from%20its%20peak.