Dont Be Spooked by Market VolatilityOpportunity Is Still Knocking!

One of the greatest fears this October—possibly the most volatile month of the year—has been the correlation between the S&P 500 Index’s ascent in the first three quarters of the year and the possible ramifications of the end of quantitative easing (QE). 

It’s well known that Japan and Singapore have been buying their countries’ blue chip stocks with their excessive money printing. Today, about 1.8 percent of the Japanese market is owned by the Bank of Japan. American investors fear the Federal Reserve might do the same and take away the punch bowl, so to speak.

As you can see, the S&P 500 Index has been rising in tandem with government securities, and it’s uncertain what will happen when QE ends. 

In 30 Years, the XAU Never Experienced a Losing Streak of More Than 3 Years
click to enlarge

The Ebola epidemic has also contributed toward moving the needle to the fear side of the spectrum and driven investors to seek shelter not in gold necessarily but in so-called “Ebola stocks.” For every negative, as tragic as they often are, there is a positive. When a major hurricane hits Florida, for instance, insurance stocks fall while real estate stocks rise. The deadly Ebola virus, on top of an aging demographic, has helped make health care and biotechnology pop this year. The Daily Reckoning’s Paul Mampilly, in fact, calls this rally “the biggest biotech market ever.”

Possibly. Before we get too excited, let’s look at the numbers. Over the last 10 years, the S&P 500 Biotechnology Index has had a rolling 12-month percentage change of ±23. As of this writing, the index is up 32 percent, meaning it’s up by only 1.3 standard deviation. In other words, biotech is behaving approximately within its expected range.

Gold bullion, over the same period, has had a percentage change of ±19—not so dramatically different from biotech—and is down by 1.3 standard deviation. Again, this is “normal” behavior.

Uncomfortable with the Volatility of Gold? It's much like biotechnology stocks
click to enlarge

As you can see, biotech corrected and then rallied firmly into the sell zone. Seventy percent of the time, it’s normal for the asset class to rise and fall one standard deviation. As I always say, each asset class has had its own DNA of volatility over the last 10 years. Knowing this helps you manage your expectations of how they perform.

Asset Class Standard Deviation
WTI Crude Oil 34%
Gold Stocks 34%
Emerging Markets 29%
S&P 500 Index 17%

Even health care and biotech companies not actively working toward finding treatments and vaccines for the virus seem to have incidentally benefited from the rally. California-based Gilead Sciences and New Jersey-based Celgene, for instance—both of which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX) and were named by Motley Fool as two of the four most important stocks of the last 16 years—have hit all-time highs. Gilead Sciences concentrates mostly on drug therapies for HIV and hepatitis B, while Celgene conducts similar work for cancer and inflammatory disorders.  

Celgene and Gilead Sciences Hit All-Time Highs
click to enlarge

And it’s not just American health care stocks that are doing well. We’ve been impressed lately with the performance of the Stock Exchange of Thailand Health Care Index and Bangkok Dusit Medical Services, Thailand’s largest private hospital operator, which we hold in our China Region Fund (USCOX). Both the index and the equity have excelled year-to-date, delivering 57 percent.

Thai Health Care Services One of the Top-Performing Sectors in Asian Industries
click to enlarge

Bullion and Gold Stocks
As for gold, between mid-August and October 3, the precious metal completely ignored the fact that September is historically its best-performing month, tumbling 9 percent from $1,310 to $1,190. It soon rebounded in the days leading up to Diwali.

Gold stocks, on the other hand, have yet to recover. Since the end of August, the NYSE Arca Gold BUGS Index has plunged 25 percent to lows we haven’t seen since April 2005. The Market Vectors Junior Gold Miners ETF has lost nearly 30 percent; the Philadelphia Gold and Silver Index (XAU), 25 percent.

On a few occasions I’ve pointed out that in the last 30 years, the XAU has never experienced a losing streak of more than three years. As of this writing, it’s lost close to 17 percent, with only two months left. The cards are definitely stacked against the XAU, but I remain optimistic it can continue the trend.   

In 30 Years, the XAU Never Experienced a Losing Streak of More Than 3 Years
click to enlarge

Many investors are understandably concerned that mining companies in West Africa will suffer because of Ebola. Several companies operating in the three hardest-hit countries have indeed been hurt by the virus, some of them being forced to halt production. However, none of our funds has any direct exposure to them. Three companies that we own in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX)—IAMGOLD, Newmont Mining and Randgold Resources—continue to operate normally in the region.

Here I must remind investors that we recommend 10-percent holding in gold: 5 percent in bullion, 5 percent in stocks. Rebalance every year.

Looking Past Ebola
One of our most important tenets at U.S. Global is to always stay curious. That includes being familiar with world events and determining how they might affect our funds. Ebola certainly falls into this category, but that doesn’t necessarily mean our funds will undergo any significant changes based on this unfortunate event. Again, other factors have contributed, including the so-called October effect. We remain committed to our fundaments and pick stocks because they’ve been well-screened and fit in our results-oriented models.

Happy investing, and stay safe!


Index Summary

  • Major market indices finished higher this week.  The Dow Jones Industrial Average rose 3.48 percent. The S&P 500 Stock Index gained 2.72 percent, while the Nasdaq Composite advanced 3.28 percent. The Russell 2000 small capitalization index rose 4.89 percent this week.
  • The Hang Seng Composite rose 2.78 percent; Taiwan rose 3.80 percent and the KOSPI rose 2.01 percent.
  • The 10-year Treasury bond yield rose six basis points to 2.33 percent.



Domestic Equity Market

The S&P 500 Index advanced sharply again this week, closing at a new all-time high.  Equity markets rallied on earnings and were pushed higher on Friday on news that the Bank of Japan increased its quantitative easing (QE) program by roughly $135 billion dollars. This more than offsets the Federal Reserve’s exit from its own QE program and just reinforces the idea that continual increases in global liquidity is good for risky assets such as stocks.

S&P 500 Economic Sectors
click to enlarge


  • The technology sector led the way in a very strong week as MasterCard and Visa both rallied by more than 13 percent to pace the sector. Both companies reported strong quarterly earnings results with increased spending and higher fees as positive drivers. Electronic Arts was not far behind, rising 12.7 percent this week as it also beat quarterly expectations and continued its turnaround.
  • The health care and financial sectors were just fractionally behind technology. Health care experienced broad-based strength with health care suppliers and managed care companies particularly strong. Financials were also very strong with good results from insurance companies leading the way.
  • Goodyear Tire & Rubber was the best-performing stock in the S&P 500 this week, rising 16.43 percent. The company reported very strong results relative to expectations and reaffirmed expectations for 2015-2016.


  • The materials sector managed to eke out a small gain but was dragged down by the big mining companies, Freeport-McMoRan and Newmont Mining, as the dollar rallied and commodities were generally under pressure.
  • Other areas of weakness included commodity chemicals, construction materials and homebuilders.
  • A notable underperformer this week was Facebook, which fell 7 percent as the company guided for sharply higher expenses next year that caught analysts by surprise.


  • Earnings season remains in full swing next week with a few notable companies to watch for including, Michael Kors and Qualcomm just to name a few.
  • Next week is also a big week for meaningful economic reports with both the ISM manufacturing index and nonfarm payrolls coming out. Employment data has recently surprised on the upside and has the potential to be a positive market mover next Friday.
  • The market made a fresh new high this week and the bull market continues.


  • After two very strong weeks the market may take a breather to consolidate recent gains.
  • The market has become somewhat dependent on global central bankers to move higher and with additional easing steps unlikely after a recent flurry of activity the market may languish.
  • Geopolitical tensions continue to be at elevated levels and there is always the possibility of a political misstep that impacts the markets.


The Economy and Bond Market

U.S. Treasury bond yields rose across the board again this week as the Federal Reserve exited its quantitative easing program. The Fed surprised the market somewhat with a more hawkish tone in the statement released after Wednesday’s FOMC meeting. A few weeks ago a more hawkish tone wouldn’t have been a surprise, but the market’s expectations of the Fed had shifted quite a bit with global growth expectations getting reined in. The market’s reaction was particularly acute in shorter maturities that are more sensitive to Fed interest rate increases.

Two-Year Treasury Yield
click to enlarge


  • The Bank of Japan surprised the market on Friday by increasing its quantitative easing (QE) program by roughly an additional $135 billion dollars.
  • In addition to Japan, other global central bankers are responding to sluggish economic growth. The Bank of England set a lower-than-expected minimum regulatory capital ratio, which set off a significant rally in banking stocks and is effectively “easier” monetary policy. The Swedish central bank also cut interest rates to zero this week.
  • Third-quarter GDP grew a better-than-expected 3.5 percent, demonstrating some economic resilience.


  • Durable goods orders fell 1.3 percent in September and were much weaker than expected.
  • Housing data points remain weak with home prices falling and mortgage applications falling 5 percent last week.
  • While widely expected, the Fed completely wound down its QE program this week and is incrementally less accommodative.


  • Global central banks are easing again, offsetting the incremental Fed tightening. This remains a positive for fixed income globally.
  • Next week is a big week for economic data as the ISM manufacturing index (a purchasing managers’ index or PMI) and nonfarm payrolls are released. The recent global trend for PMIs has been weak and it wouldn’t be surprising if the ISM manufacturing index disappointed, allowing bonds to rally.
  • Short-term bonds have been relatively volatile in recent weeks and with yields moving higher the past two weeks, a reversal would not be surprising.


  • The European bank stress tests have come and gone, and while generally in-line with expectations and not too troubling, there remains work to be done to restructure the European banking system before the next downturn or panic.
  • Quantitative easing has ended and the next logical step would be an interest rate hike. While estimates of when that may occur remain fluid, the Fed’s relatively hawkish tone increases the risk to the bond market.  
  • With geopolitical situations in Ukraine, Iraq and Syria, Greece’s economy, and new Ebola fears, investor anxiety remains high along with further volatility.



Gold Market

For the week, spot gold closed at $1,171.09 down $59.81 per ounce, or 4.86 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 14.67 percent. The U.S. Trade-Weighted Dollar Index jumped 1.31 percent for the week.

Date Event Survey Actual Prior
Oct 28 U.S. Durable Goods Orders 0.5% -1.3% -18.2%
Oct 28 U.S. Consumer Confidence Index 87.0 94.5 86.0
Oct 30 U.S. GDP Annualized QoQ 3.0% 3.5% 4.6%
Oct 30 Germany CPI YoY 0.9% 0.8% 0.8%
Oct 31 Eurozone Core CPI YoY 0.8% 0.7% 0.8%
Nov 02 HSBC China Manufacturing 50.4 -- 50.4
Nov 03 U.S. ISM Manufacturing 56.2 -- 56.6
Nov 05 U.S. ADP Employment Change 220K -- 213K
Nov 06 U.S Initial Jobless Claims 285K -- 287K
Nov 07 U.S. Change in Nonfarm Payrolls 235K -- 248K


  • Despite declining gold prices, demand for the precious metal remains strong. In September, Chinese gold imports from Hong Kong rose to the highest level in five months as retailers increased purchases before the holiday season. In the United States, gold coin sales are heading for their first back-to-back monthly increase since January. Volume rose to 58,000 ounces as we entered the last week of the month, compared to 50,000 ounces in September.
  • Although gold premiums had fallen to below $10 per ounce earlier this week in India, they rallied on Wednesday to reach roughly $15 per ounce. The initial decline was due to the winding down of the Diwali holiday. However, the premium spiked up after rumors emerged that the Reserve Bank of India or the Ministry of Finance might impose more restrictions on gold imports.
  • A number of gold companies reported misses on production this week, but Alacer Gold reported strong third quarter results. The company saw gold production increase 27 percent which helped to drive production costs lower.  In addition, Alacer’s cash balance rose by $28 million to $320 million. 


  • This week we saw gold markets wildly affected by central bank policy makers across the world. In the United States, a more hawkish tone from the Federal Reserve, combined with the official announcement of the end of Quantitative Easing (QE), pushed gold prices down. On Friday, the Bank of Japan surprised investors with a substantial expansion in its asset purchases and a commitment to double its purchases of equities, making the central bank the single biggest holder of Japanese equities.  These two events, combined with stronger-than-expected, third-quarter GDP data from the U.S., caused a selloff in gold and gold stocks this week.
  • Investors should remember that U.S. elections are next week and the current administration is putting the best face possible on what has been an anemic recovery.  Even Alan Greenspan noted this week that QE has failed to right the economy, but did lift asset prices.   For example, while the Fed desperately sought to stimulate the housing sector, the homeownership rate in the third quarter came in at 64.4 percent, the lowest level since 1995.  Furthermore, while QE has been halted, the Fed will continue to reinvest the principal payments from mortgage-backed bonds and roll over any maturing Treasury securities from its $4.5 trillion portfolio. We are living in a world of unrepayable debt, money printing, and governments buying equities to create a wealth effect – yet life goes on without a worry.
  • As a consequence of this week’s announcement from the Federal Reserve, gold traders turned bearish for the first time in six weeks. A Bloomberg survey revealed nine bearish forecasts from analysts, compared to only five bullish.

Philadelphia Gold and Silver Index (XAU) Appears Due for a Correction
click to enlarge


  • Related to the above point on U.S. GDP growth, the third quarter yielded stronger-than-expected results due to a substantial increase in government spending. As it turns out, 0.83 percent of the GDP gain was attributed to government spending, primarily defense spending. JP Morgan, in response to this data, reduced its forecast for fourth-quarter GDP growth from 3.0 percent to 2.5 percent, explaining that this type of increase is usually associated with payback the following quarter.
  • Alan Greenspan has come out with interesting points on the current global economic environment. The former Federal Reserve Chairman referred to QE as a pile of tinder that hasn’t been lit. Furthermore, due to the global turmoil, Greenspan stated that gold is a good place to invest money due to its value as a currency outside of government policy. In fact, he argues that gold is the premier currency, more so than the dollar.
  • Civilian wages and salaries appear to be on the rise, which is a powerful source of inflation. Higher wages, which lead to higher incomes, fuel higher demand and pull up prices. The long-awaited arrival of strong inflationary pressures in the United States appears to be on the horizon.

Pay Attention to Rising Trend in Wages
click to enlarge


  • Depressed oil prices are contributing to the deflationary environment. Without any catalyst to boost oil prices, gold will continue to face the headwinds from global deflation.
  • Social unrest has come to the capital of Burkina Faso, Ouagadougou, after a proposal to enable the current president to stand for another five-year term, was submitted to parliament. Protestors have set fire to parliament, city hall and the headquarters of the ruling party. Mining companies in the region have been negatively affected. Specifically, Roxgold declined 27 percent this week on the news, despite the fact that the company reported being unaffected by the unrest.
  • There is speculation that Red Kite Group, a London hedge-fund manager, has bought more than half of the copper held in London Metals Exchange warehouses. Although no material news has been reported, such substantial control over supply could have serious implications.
Frank Talk Insight for Investors
October 28, 2014
Talking Turkey with John Derrick
October 27, 2014
As the Eurozone Stalls, China Cuts the Red Tape
October 21, 2014
New Jobs Data: America off the Mat, Ready for the Next Round
A Blog by Frank Holmes, C.E.O. and Chief Investment Officer

Energy and Natural Resources Market

Brent Oil Price REquired by Countries to Balance Fiscal Budgets per Billion U.S. Dollars
click to enlarge


  • Oil and gas refining stocks outperformed this week in a strong-dollar environment. The S&P Supercomposite Oil & Gas Refining & Marketing Index was up 3.88 percent. Marathon Petroleum and Tesoro were up 5.96 and 8.72 percent, respectively, following strong earnings reports.
  • Chemicals stocks outperformed the broader resources space this week. The S&P Supercomposite Chemicals Industry Index rose 1.12 percent this week, as Agrium was up 5.81 percent, bouncing significantly off of prior lows.
  • Iron and steel stocks rallied for the third week in a row. The Bloomberg World Iron/Steel Index was up 1.82 percent and U.S. Steel, which reported impressive quarterly results this week, closed up 8.45 percent.


  • Precious metals stocks significantly underperformed this week, with gold and silver stocks declining substantially after the announcement from the Federal Reserve. The NYSE Arca Gold Miners Index and the Global X Silver Miners ETF were down 14.37 percent and 14.31 percent, respectively.
  • Industrial metals stocks continue to underperform amid a slower global growth environment. The S&P/TSX Capped Diversified Metals and Mining Index declined 1.74 percent this week.
  • As oil prices continue to decline, WTI crude dipped below $80 per barrel during the week, eventually closing at $80.57 per barrel. The continued depression of oil prices, led by perceptions of weak global demand and ample supply, continue to create headwinds in the commodities space.


  • One of the largest potential benefits to oil prices continues to stem from the OPEC meeting taking place at the end of November. As depressed prices weigh on revenue, any action the cartel takes to limit supply would send oil higher.
  • While sentiment remains mixed, certain analysts are projecting future oil prices to rebound. With refineries in the United States absorbing crude inventories, WTI could rise to as much as $90 per barrel by the end of 2014. On a relatively longer timeline, Barclays forecasts that Brent prices could be back over $100 per barrel by the end of 2015.


  • Expanded stimulus in Japan and newly implemented stimulus in the eurozone serve to weaken both the yen and euro, which will cause the dollar to rally further. While it seemed as if the dollar had reached an upper limit, there is still the possibility that the currency could inflate even further. On a positive note, however, the long-term benefits of the stimulus policies (if effective) could spur global growth, which would boost commodity demand and prices.
  • Global growth fears and the deflationary environment have yet to dissipate. Commodities will remain depressed if market sentiment does not shift.



Emerging Markets


  • Two of the best-performing countries this week were Russia and Brazil. Both increased key rates in order to address their struggling economies and currencies. In Russia, the central bank raised the key rate to 9.5 percent, above analyst estimates. Brazil’s central bank policy makers voted five to three to raise the benchmark lending rate by 25 basis points to 11.25 percent. The MICEX Index closed up 7.83 percent this week, while the Ibovespa Brasil Sao Paulo Stock Exchange Index rose 5.17 percent this week.
  • China was one of the best-performing countries in Asia this week, as its central government stressed policy support for consumption and property, as President Xi Jinping hinted on potential expansion of free trade zones to other parts of the country beyond Shanghai.
  • Turkish stocks continued to rally this week as falling oil prices and synchronized global stimulus boosted the country’s economic outlook. The Borsa Istanbul 100 Index rallied 1.46 percent, making this the third-straight weekly increase.


  • Greek stocks suffered this week after the Minister of Administrative Reform, Kyriakos Mitsotakis, said there will be a climate of uncertainty until February’s elections. Yields on Greek 10-year bonds jumped 73 basis points to over 8 percent this week. The Athens Stock Exchange closed down 7.62 percent.
  • The South Korean won was among the worst-performing currencies in Asia this week, after the U.S. Federal Reserve officially ended its quantitative easing (QE) program and the Bank of Japan unexpectedly decided to accelerate the expansion of its monetary base to mitigate the impact of higher sales taxes to reflate the economy.
  • Depressed commodity prices, particularly oil and industrial metals, have led investors to maintain a sour outlook on commodity-sensitive emerging markets. Slowing growth in China and Europe has led to significant outflows from exporting emerging markets and their currencies for the past few weeks.  


  • Brazil’s recent rate hike creates a significant opportunity in one of the world’s largest emerging markets. The country’s economy, currently in recession, has been dealing with a depreciating currency and inflation pressures. Tighter monetary policy should help strengthen the real and subdue inflation, providing a boost to Brazil’s future growth.
  • Upcoming third-quarter earnings reports for China’s Internet and e-commerce bellwethers, along with the peak online shopping season, should refocus investor attention to the secular growth potential of mobile Internet in China enabled by a lifestyle change with rising smartphone penetration.  China already represents 35 percent of global e-commerce sales as of 2013, and rising adoption by small businesses and the rural population could bring China’s share to 50 percent by 2018, according to Morgan Stanley.

China's Mobile Internet Lifestyle to Continue to Grow
click to enlarge

  • Lower oil prices, while detrimental to exporting emerging markets, has been a tailwind for oil-consuming emerging markets. With oil prices continuing on a downward trend, it appears this tailwind will still be in effect in the near future.


  • A direct contrast to the situation in Brazil, the rate hike in Russia will likely harm the country’s economy. This is the fourth time this year that Russia has raised rates in order to defend the crumbling ruble. Despite positive reactions in the equities market, the currencies market was less understanding. The ruble slid to record lows this week in spite of the rate increase. Therefore, the policy move seems to be rather ineffective for the time being. Furthermore, current borrowing costs in Russia are unsustainably high and are strangling economic growth. The economic environment in Russia is only becoming more concerning.

The Ruble Falls as Central Bank Raises Rates
click to enlarge

  • The recent push from the Chinese government to promote breastfeeding, through educational programs and initiatives, has added more lactation rooms in public buildings. This move could dampen investor sentiment toward infant formula makers.
  • The implementation and expansion of monetary stimulus in the eurozone and Japan will likely push up the U.S. dollar, which climbed to new highs on Friday. A further rise in the dollar will continue to be a threat to emerging markets.

© US Global Investors

© U.S. Global Investors

Read more commentaries by U.S. Global Investors