The financial markets put on quite a show Thursday. Stocks plummeted with an eerily high correlation and Treasuries continued to rise to multi-month highs despite the recent possibility of technical default and threats of credit downgrades. These are interesting times for the market and as such, investors should pay close attention to the following factors for signals regarding the future condition of the financial markets.
On Thursday, the U.S. stock market plummeted and the S&P 500 volatility index spiked. Thursday's volatility spike was indeed worth noting. The +35.4% move from 23.38 to 31.66 was a huge increase. The VIX has not traded at these levels since early July 2010. Investors should pay close attention to the volatility in the equity markets. Amid some serious macroeconomic concerns, may market watchers have pointed out that it was strange to see the VIX at subdued levels. If the VIX breaks out here, it could be a headwind for the stock market. Investors can track the volatility index through iPath S&P 500 VIX Short Term Futures (VXX).
2. Precious Metals
Gold has been the market's superstar. If you listen to gold bulls, the precious metal is the perfect cure for all investor concerns including inflation, deflation, political turmoil and general economic uncertainty. But strangely enough, the metal seemed to fail investors during the equity market sell-off. The SPDR Gold Trust (GLD) initially rallied on the stock market weakness, trading as high as $163.87, but it finished lower on the day closing -0.53% at $160.64. This failure was likely the result of the market's frantic shift in sentiment and ensuing sell-off. So long as gold continues to decline with the rest of the equity market, investors should realize that this is not a normal sell-off.
3. Blue Chip Stocks
McDonald's Corp (MCD), Johnson & Johnson (JNJ), Procter & Gamble (PG) Kraft Foods (KFT) and Coca Cola (KO) were all aggressively sold off during the Thursday trading session. While the fears about macroeconomic and political issues likely caused or contributed to the market's setback, it is hard to be overly critical of the blue chip companies like the ones mentioned above. They have grown revenues, they offer international exposure, they face stable demand for their products and most importantly, the will likely all benefit from a secular trend towards increasing global per-capita income.
U.S. multinational blue chip companies are some of the cheapest and safest stocks in the market place.
- MCD trades at a trailing P/E of 17.05, a forward P/E of 14.71 and a PEG ratio of 1.58 despite having a lot of growth ahead and one of the world's top brands.
- KFT trades at a trailing P/E of 19.59, a forward P/E of 13.51 and they also recently announced a plan to split up the company in two. Not only is the company reasonably priced and primed for margin improvement, they have a near term catalyst to drive the stock price.
These blue chip stocks trade at low valuations despite offering ownership of strong companies. As such, any continued sell-off in the blue chip stocks is akin to baby being thrown out with the bathwater. As long as this continues, investors should realize that the market is not undergoing a standard rebalancing and may instead be undergoing a wholesale sell-off.