Stock markets have seen a resurgence in volatility this past week, and the recent selling pressure could be just the tip of the iceberg. The idea of a significant global trade war is weighing on investor sentiment, and the next few weeks could see some fireworks.

 

This past week, the Trump Administration announced tariffs on up to $60 billion in Chinese goods. This move came just weeks after the administration announced a new duty on steel and aluminum imports. China does not plan to sit idly by, however, and on Friday announced possible tariffs on 128 U.S. products.

 

A potential duty could be placed on a wide range of U.S. goods, although agricultural products could be hit hardest. Soybeans, in particular, could see a significant duty implemented, which could have a dramatic impact on exports.

 

The week’s tit-for-tat could simply be the opening salvo on what could become a prolonged trade war, one that could have important consequences for U.S./China relations.

 

Although the effects of such a trade war remain unclear, it stands to reason that exports suffer while prices for consumer goods could rise. If that is the case, stock markets could also continue lower as sales slump.

 

This past week, the U.S. Federal Reserve hiked interest rates by 25 basis points, bringing the Fed Funds rate to a range of 1.50-1.75%. The central bank also raised its “neutral” level on rates, which is the level at which rates are not seen as boosting or slowing economic activity. Some Fed officials remained cautious about the outlook on inflation, and there is the potential for the central bank to add a fourth rate hike this year or even implement a 50 basis point hike.

 

Whatever the Fed does or doesn’t do, it seems that the stock market could potentially be at or near the end of the bull market. If the Fed hikes rates more aggressively to stay ahead of the inflation curve, stocks would likely move lower. If the Fed doves keep the pace of rate hikes low and slow, inflation could accelerate and eventually shot beyond the central bank’s desired target of 2% annualized.

 

The big picture points to an asset reallocation, from stocks and risk assets to perceived safe haven assets. Gold has been moving higher on the threat of a trade war, and if the trade situation escalates further, more upside may be seen in the weeks and months ahead.

 

Of course, the ongoing state of geopolitics may also keep a floor under gold prices and could potentially act as significant resistance for a stock rebound. U.S. National Security Advisor H.R. McMaster was the latest to leave the Trump Administration this past week, and his replacement, John Bolton, is considered by many to be a war-hawk that could implement a much harder line in U.S. foreign policy.

 

The current shakeup is not likely over, either. More administration officials could be shown the door in the weeks ahead, at a time when the special counsel investigation into possible collusion with Russia seems to be picking up speed. In fact, there has been increasing discussion over the possibility of President Trump firing Special Counsel Robert Mueller III. If such a scenario did unfold, the U.S. could face a constitutional crisis the likes of which has not been seen before. This, in turn, could fuel a stock market sell-off that would give every major previous market crash a run for its money.

The gold market remains on the defensive, with a weakening technical posture inviting more selling. Gold has been ebbing and flowing with overall investor sentiment, and risk appetite has remained robust, for now anyway.

 

Any further dips in the price of gold should, in our opinion, be viewed as a solid buying opportunity. Although numerous analysts have been ringing the alarm bell over the years for the end of the bull market in stocks, the rally’s ninth anniversary has once again fueled some strong words of caution.

 

Now that the Trump administration has passed its highly anticipated tax reforms, Chief Economic Advisor Gary Cohn has resigned and the November midterm elections could be gearing up for some key battles, investors should be asking what may keep the current rally on track. Unfortunately for stock market bulls, that’s a very difficult question to answer. Not only might there be little left in the tank to keep equities moving higher, but several key issues are lurking in the background, issues that could not only halt the rally in its tracks but send it crashing down.

 

Recent stock market volatility, a potential trade war, higher rates, accelerating inflation, overstretched valuations and other geopolitical issues are all good reasons to be focused on one thing and one thing only: Value.

 

The recent correction in stocks could simply be the first wave of a major, long-term top. Markets do have a tendency to exhibit heightened volatility at major tops and bottoms, and another round of selling in the weeks ahead could be another major symptom of a market that has become exhausted. Not only that, but any significant retaliation on global trade or a more aggressive Fed also has the potential to spoil the party. One could argue that there are far more reasons for the market to go down rather than up from current levels.

 

The unfolding economic scenario could be considered extremely bullish for gold and other hard assets. The yellow metal may not only respond well to a more inflationary environment, but could also stand to benefit handsomely if investors begin exiting stocks in droves. And if that isn’t enough to justify higher gold prices, the dollar also remains vulnerable to a fresh and significant leg lower in value.

 

Taking an objective look at the big picture, gold may represent a far greater long-term value at current price levels compared to stocks. Although stocks may have some left in the tank yet before the bull market finally comes to an end, the potential risks of buying at current levels arguably do not justify the potential rewards. Savvy investors may not look to buy the bottom or sell the top, but rather look to play between the 30 and 70 yard lines. The stock market may right now be looking at first and goal from the 5.

 

This makes now the ideal time to consider further diversification with assets that can potentially increase significantly in value, while also possibly providing a key hedge against inflation, recession and a weaker currency.