Fear is making a return to Wall Street.
Just a few weeks ago the U.S. stock market was flirting with record highs. Now, stocks are in retreat due to mounting concerns over next week’s Brexit vote in the U.K. and frustration with global central banks.
“Markets are showing tremors,” said Michael Block, chief strategist at Rhino Trading Partners, in a note.
Just look at these four major developments:
1.) The Dow dropped as many as 169 points on Thursday morning before rebounding to turn positive. The S&P 500 is flat, meaning it’s in jeopardy of suffering the first six-day losing streak since the market freakout in August.
2.) Gold, which tends to rise during times of fear, soared as much as 2% on Thursday to $1,318 an ounce, the highest since August 2014. The precious metal is now up seven days in a row and an incredible 24% this year.
3.) Bond yields, which move in opposite directions to their price, have plummeted to ridiculously low levels. That may be spooking investors. The U.S. Treasury yield dropped to 1.52% on Thursday. That would have been the lowest close since 2012, but yields have since rebounded to 1.57%.
4.) CNNMoney’s Fear & Greed index briefly flipped back into “Fear” mode. That’s a huge reversal from a week ago when the gauge of market sentiment was flashing Extreme Greed.
So what’s causing the recent jitters on Wall Street?
A wave of polls show the U.K. could vote to leave the European Union. Up until recently, the markets — and oddsmakers — had been ignoring the notoriously-unreliable polls and betting that the Brexit vote would fail.
Leaving the EU could fuel a recession in the U.K., cause stocks in London to crash, send the British pound plunging and even create turbulence in U.S. markets.
That’s to say nothing of the long-term questions a Brexit would raise about the future of European integration.
Global central bankers are also contributing to the uncertainty.
The U.S. Federal Reserve once again dialed back its plans to raise interest rates this week.
Not only does that raise doubts about the health of the U.S. economy after the awful May jobs report, but the Fed’s reluctance is renewing fears the central bank will be unable to lift low rates anytime soon..
“This is about monetary policy exhaustion and fear we’re stuck in something of a fed funds rate purgatory,” said Kristina Hooper, U.S. investment strategist at Allianz Global Investors.
The Bank of Japan, which also met this week, is struggling to keep its currency from rising. Investors were alarmed as the yen surged another 1.5% against the U.S. dollar.
“Central bankers are actually making things worse,” said David Kelly, chief global strategist at JPMorgan Funds.
The confusion is most obvious in the bond markets.
U.S. Treasury yields are getting closer to record lows. The German 10-year bond yield went subzero this week for the first time ever. That means investors are paying the German government for the right to lend it money for 10 years.
“Think about what that means. It turns all economic theory on its head,” said Kelly.
Despite that, Kelly isn’t bracing for a big market plunge, in part because extremely expensive bonds make stocks look decent in comparison.
“The fact the U.S. economy is doing fine will limit any correction. And people may want to jump out of stocks, but where shall they jump?” he said.
Hooper warns of more turbulence ahead and thinks gold is among the only major asset classes that looks very attractive in these uncertain times.
“Stocks will likely finish the year fairly flat, but it will not be an easy journey. There’s likely to be some hills and valleys ahead,” she said.
