Metals Market Pushes Equities Around

Equity markets were affected by a dislocation in the metals markets last week. On top of that there were concerns over a government shutdown, a new Federal Reserve

Chairman, and a declining US dollar. On Friday, several key metals saw major declines - most notable Gold (-9%) and Silver (-26%) - which likely caused some forced selling of equities. Based upon what is known currently, the major movement in the metals market looks to be less by fundamentals and more by speculation. There remains higher demand and less supply of these key metals, yet the "spot" prices in the U.S. dropped on Friday. As of now, there remains a 50% difference between the "spot" price of Silver and the price of a physical bar of Silver. In addition, Silver exchanges overseas have a much higher valuation for the metal than the U.S. exchange. So far this morning, metal pricing appears to be more stable.

A deal to avoid a government shutdown stalled on Friday and so we now appear to be in a "partial" shutdown. There is some talk of deal possible by Tuesday, but that remains

up in the air for the moment. It's important to remember that over the past 22 shutdowns, markets averaged a slightly positive return. The President's pick to replace Fed Chairman Powell was revealed last week to be Kevin Warsh (a former Fed board member). The consensus is mixed as to whether he would lean "hawkish" or "dovish." Regardless, household assets have far out-grown debts, meaning that we are not yet experiencing the debt levels of the 2008 Financial Crisis. The Fed left rates unchanged last week, meaning that financial conditions remain stable.

Despite Friday's decline, hard data suggests the consumer remains strong. Over the past 5 years, "soft" data (i.e., survey data) has differed from "hard" data (actual metrics).

Redbook Sales continue to be strong and above average, despite consumer survey information showing a slowing consumer. The good news is that when the market is up for the 1st 5 trading days of the new year and the month of January is positive (as is the case this year), markets are higher for the full year 92% of the time with an average return of +18.4%. Despite the metals market volatility and government shutdown, making "knee-jerk" investment decisions at this pint is likely not a good strategy.

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