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January 27, 2022

With the Dow Dropping, Is Now A Good Time to Buy Precious Metals?

“The stock market was heading for some big gains—until Federal Reserve Chair Jerome Powell stopped it in its tracks.

The Dow Jones Industrial Average fell 131 points, or 0.4%, while the S&P 500 slipped 0.2% and the Nasdaq Composite was little changed. The Nasdaq was up as much as 3%, while the S&P 500 was up around 2% immediately after the announcement. The Dow was also in the green earlier in the day.

The stock market’s gains turned to mostly losses after the Federal Reserve left interest rates unchanged for the moment, but said hikes are on the way. Fed Chair Jerome Powell’s words—about how much the Fed could tighten and about the central bank’s balance sheet—added insult to injury.

The Fed may not be hiking interest rates today, but said high inflation will elicit rate increases soon. “It will soon be appropriate to raise the target range for the federal-funds rate,” the Fed’s release read. By March, the Fed plans to have ended its bond-buying program. At the news conference, Powell didn’t comment on exactly when the Fed would begin reducing the size of its balance sheet, though it said it intends to do so after it begins raising rates.

Andrew Brenner of NatAlliance Securities, however, blamed the decline on Chairman Jerome Powell’s tone. “Powell sounding much more hawkish in the presser,” he wrote. “Treasuries hit …and equities giving back gains.” Others agree.

Partly, “the decline reflects the fact Powell expects to raise rates several times and stated that the economy is on solid enough footing to handle multiple rate hikes,” said Michael Sheldon, chief investment officer at RDM Financial Group. That certainly makes it sound like the Fed is willing to be aggressive in hiking rates.

The 2 year Treasury yield shot up to 1.14% from its low for the day of 1%. That yield tries to forecast the level of short-term rates for the next couple of years. As Powell spoke, the 10-year Treasury yield, which moves in the opposite direction of price, rose 1.86%, a level it hasn’t seen since about one week ago.

To be sure, not much of this was new to the stock market. The interest rate market had already been reflecting that the Fed will lift the benchmark lending rate four times this year starting in March, a move that could slow down economic growth. The central bank is also expected to soon begin reducing the size of its balance sheet. Still, the gains faded and it may be partly because there is still some Fed-related uncertainty that didn’t go away upon the Fed’s release. Simply put, inflation has soared and the Fed may have to lift rates so quickly that the stock market will fall hard.

“One of the biggest risks for this year is a Fed policy error,” said Todd Thompson, portfolio manager at Reams Asset Management. “They’re so late in getting to this [rate increases].”

Until the Fed’s Wednesday release, investors had been in dip-buying mode after two days in which the S&P 500 had briefly entered correction territory, defined as a 10% or greater drop from an all-time high. The Nasdaq is already trading in correction territory.

Even though the stock market looked like it was in a good mood earlier in the day, it never truly showed that it’s out of the woods from its larger drawdown. The S&P 500 went only slightly above its 200-day moving average of roughly 4,430, before tumbling. That fall indicates that investors—seeing Fed-related risks on the horizon — are still not yet comfortable buying stocks at prices consistent with their longer-term trends.

That’s not surprising, says Keith Lerner, co-chief investment officer at Truist. After heavy dip-buying, the stock market often takes a breather, or stops making large gains, for a short period, he said.

In the commodity space, crude prices continued their march upward to the highest levels in eight years. Futures contracts for West Texas Intermediate rose 1.1% to above the $86 a barrel milestone for the first time since 2014.”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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