Don’t believe me? Then just look at the S&P Volatility Index, or VIX. In August, it soared to more than 53 when the market melted down. In October 2014, it jumped to more than 31.
Want to go back even further? In the summer of 2011 when the debt ceiling debacle unfolded, it surged into the mid-to-high-40s multiple times over a period of several weeks. In the spring of 2010 when we had the Flash Crash, the VIX spiked above 30 several times — and jumped as high as 48 — over a period of a few weeks.
Then there are the credit crisis days of 2007-09. We saw several spikes into the mid-30s in the early phases of that crisis. Then there was the mother of all explosions in the fall of 2008 — to just shy of 100!
I’m not saying things are as bad now as they were when the Great Recession was raging … when Lehman Brothers was going under … when the Dow Industrials was swinging between 500 and 800 points every few days … or when former Treasury Secretary Hank Paulson was literally getting on his knees and begging Congress for hundreds of billions of dollars in bailout money.
|Nail-biting time in the markets.|
But can we all agree that the carnage in commodities is virtually unprecedented? Can we all agree that emerging-market currencies are plunging at some of the fastest rates ever, and in some cases, to the lowest levels ever?
Can we all agree that corporate earnings are disappointing, and that key sectors like autos, banks and tech are now in serious danger?
That more and more corners of the global economy, including China, are slipping into or close to recession?
That the junk bond, leveraged loan, and convertible bond markets are reeling?
You could argue that stocks are pricing in some of those problems by having the worst start to any year since at least 1896. And some Wall Street firms are clearly throwing in the towel.
But VIX hasn’t really soared (yet) and I haven’t (yet) really seen the huge “risk off” moves I’ve been expecting in things like the Japanese yen. Even at the worst level of the day, the VIX only hit 30.9.The evening news isn’t camped outside the New York Stock Exchange yet, nor are “bloodbath on Wall Street” stories plastered across the front page of your local newspaper.
That’s not to say today was a good day for stocks. It wasn’t, and a key contributor was the litany of putrid economic data we got.
Let’s start with retail sales for December. Overall sales fell 0.1%, ex-autos sales fell 0.1%, and ex-autos, ex-gas sales fell 0.5%. All of those readings missed forecasts. The full-year gain in sales — 2.1% — was the weakest going all the way back to 2009.
The Producer Price Index also fell 0.2% last month, underscoring disinflationary pressures on the economy. Industrial production plunged 0.4% in December, more than double the 0.2% decline that was forecast. Capacity utilization sank to 76.5%, the lowest since March 2012.
|“I have been urging you for months to dramatically cut your stock exposure.”|
Lastly, the Empire Manufacturing Index of factory sector conditions in the greater New York area plunged to -19.4 in January. That was far worse than the -4 reading that economists were expecting, and down sharply from -6.2 in December.
So what should you do? Well, hopefully you’re sitting pretty during this downturn because you followed the advice I’ve been offering since last spring to dramatically cut your stock exposure, raise much more cash and hedge/target downside profits with inverse ETFs and other profit-packed investments. If you have to own stocks, at least focus on highly rated, non-economically sensitive stocks.
If you haven’t taken protective action, then don’t wait any longer. Also feel free to check out my “Bear Market Playbook” columns from September, located here and here. They have more practical guidance.
(Editor’s note: Mike also has specific recommendations in his Interest Rate Speculator service. He just made some more “buy” and “sells” this week for subscribers.)
Lastly, and as always, stay safe and share your market thoughts at the website below. Your fellow investors will no doubt appreciate hearing your views in these turbulent times.
The piece from my colleagues on Europe elicited several comments on the current economic and political situation there.
Reader J.R. said: “I am a former American diplomat and international businessman now retired in Europe with my European wife. The lack of fast action by E.U. leaders to get immediate control of the refugee crisis resembled their endless bungling with the Greece crisis. And now the one strong leader in the E.U., Merkel, is crumbling fast.
“I know a ranking Swedish doctor who is so fed up with the Swedes about the refugees and the way they are handling it, he is planning to leave Sweden. And you don’t seem to realize to a significant degree what an exit of the U.K. from the E.U. would do to the E.U. I think the E.U. is in deep trouble.”
Reader S.T. added: “The E.U. is on an unsustainable course. The sad part is, and of which I am convinced, when the E.U. goes down, they will bring the U.S. down with it. Many of our U.S. banks’ investments are tied in to the E.U. What affects them will eventually (probably shortly) affect us.”
But Reader Jim injected a bit of optimism into the debate, saying: “When you take into account all the incredibly dumb and destructive things the Europeans have done to themselves over the last hundred years, it’s a wonder they are still viable in any form. But they have shown themselves to be extremely creative and resilient over and over again.
“With their rich cultural history as a road guide, I can’t help but think they somehow manage to snatch victory from the jaws of defeat one more time. Rank social and economic policies and a few refugees are nothing compared to what they have overcome in the past. My money is on them.”
Thanks for sharing. I’m an economic and markets analyst first and foremost, rather than a specialist in European government activity or social policy. So my most useful contribution here would be to point out that the serious problems in Russia (a key trading partner) and China (another one) are major threats to Europe’s economy.
European banks are also loaded up with credit and market risk. And they’re getting slammed left and right with government investigations, multi-billion charges, and “requests” to raise more capital. Those forces will continue to weigh heavily on European stock markets.
That’s why I’ve been targeting vulnerable foreign bank shares in my Interest Rate Speculator service.
General Electric (GE) agreed to sell its home appliance business to China’s Haier Group for $5.4 billion. Haier has been looking to expand into the U.S., while GE has been trying to jettison the business to focus on other units.
More Wall Street firms are pushing through layoffs in their fixed income and commodities businesses amid declining trading activity and slumping revenue. Morgan Stanley (MS) and Goldman Sachs Group (GS) are both reportedly cutting jobs here. That adds to the thousands of other job cuts that banks have announced recently in New York, London, Asia, and continental Europe.
Speaking of Goldman, the firm just reached a $5.1 billion settlement over its activities in the mortgage backed securities market during the credit boom. The deal with the U.S. government will result in Goldman paying $2.4 billion in civil penalties to the Department of Justice, $875 million to other agencies, and $1.8 billion in aid to borrowers.
What do you think of the lousy economic data — does it show the U.S. is catching the global flu? Are bank layoffs going to continue, and what does that say about the health of the markets? Are you as “shocked” as I am to hear about yet ANOTHER multi-billion dollar settlement on Wall Street? Let me hear about it in the comment section below.
Until next time,