The truth may just be that the markets are in a fragile state right now. Investors are spooked by their own shadows as they head into a new year with the unknown quantity of a new Federal Reserve chair... the uncertainty surrounding the QE taper and new horror stories coming out of the Chinese shadow banking sector.
While much of America is concentrating on dissecting President Obama's State of the Union address, the markets are still digesting the carnage we've seen unfolding over the last week. After days of triple-digit losses capping the worst week on Wall Street since 2011 the Dow stood under 16,000 and the S&P under 1800. Analysts looking for reason behind the madness cast their nets widely.
Most talking heads settled on the idea that it was due to a emerging market sell-off driven by concerns over political and economic instability in Turkey, Ukraine and Argentina. Others postulated it was due to disappointing Chinese PMI data that shows Chinese manufacturing contracting (despite Beijing's release of a heavily cooked 7.7% GDP growth figure for 2013). Neither of these explanations seem quite adequate to the task of describing the global sell-off that took place last week, especially since many of these problems (emerging market growth, worries about Chinese manufacturing) have been brewing for months if not years.
The truth may just be that the markets are in a fragile state right now. Investors are spooked by their own shadows as they head into a new year with the unknown quantity of a new Federal Reserve chair coupled with the uncertainty surrounding the QE taper and new horror stories coming out of the Chinese shadow banking sector on seemingly a daily basis (only some of which are hoaxes). At the end of the day, investors seem just as stymied about which way the market is heading as your average Joe Sixpack observer of these market swings.
One thing that is not being neglected at the moment, though, is the manipulation of the gold price. We had a flight to safety effect kick in last Wednesday night, taking gold from $1232.20 to $1264.80 in under 24 hours on the way up to $1275.60 to start the week. We've seen that trade reversing since then, however, with the price winding back to around the $1250 mark as of press time.
One has to imagine that if there were to be a market “state of the union” speech today, it wouldn't be a very optimistic one. For whatever recovery the markets are making this week, last week's jitters show that there are a lot of investors who are still very worried about the overall stability of this equities bull market. After all, if this is the way the Dow and S&P react to a bit of bad news from abroad, can you imagine what will happen if and when the Fed begins to turn off the spigots on their central bank funny money?