Stocks took another header today, with the Dow Industrials plunging 469 points, and the Nasdaq Composite shedding 2.8%. The VIX index of volatility jumped to almost 34, while “risk off” moves were the name of the game in currencies.
What’s causing the renewed turmoil? A simple fact: Numbers don’t lie. And today, they showed that manufacturing and exports are tanking worldwide.
In China, a key “official” index of manufacturing activity sank to 49.7 in August from 50 in July. That was the weakest in three years. A separate private report on production also remained stuck near its lowest in more than six years.
In South Korea, exports plunged at a massive 14.7% rate in August. That was far worse than the mid-single-digit decline that was expected, and the biggest plunge since the 2009 Great Recession.
Manufacturing activity in Chinese trading partners like Malaysia, Vietnam, and Japan is also falling. Indonesia showed its 11th straight contraction last month.
|Manufacturing in China and elsewhere in Asia is struggling.|
Many on Wall Street had been counting on the U.S. to hang in there, even as many foreign markets and economies deteriorate. But today’s Institute for Supply Management report dashed those hopes. The U.S. index sank to 51.1 in August from 52.7 in July. Not only did that miss economist forecasts, but it was also the worst reading since May 2013. That’s 27 long months ago.
Seeing a trend here? The numbers show the global economy is losing momentum, led by sharp slowdowns in emerging markets. Heck, even our neighbor to the north, Canada, just slipped into recession after its economy shrank for the second quarter in a row.
Now here’s where things get interesting to U.S. investors. I noted several days ago that the junk bond market was trading at levels that suggested the Dow Jones Industrial Average could trade down to around 13,000. A separate carry trade index I wrote about on Aug. 28 is trading at a level last seen when the Dow went for about 10,000.
The last time the Chinese manufacturing index was at these levels, the Dow went for the mid-12,000s. And the last time our ISM index was at these levels, the Dow was around 14,800.
Again, I’ll ask: Are you seeing a trend here? We’ve seen the U.S. stock market start to crack, with wild declines and equally powerful short-term bounces. But we’re still trading at far higher levels than several indicators suggest we “should” trade at.
|“Raise cash, grab profits, sell losers and buy hedges.”|
None of that guarantees stocks will plunge. Other influences can drive equities on any given day, week, or month. But the sum total of the indicators I watch suggest this is the time to “raise shields,” so to speak, and gird for a battle with an increasingly volatile market. That means raise cash, grab profits, sell losers, and buy hedges like inverse ETFs and put options on big rallies when they’re cheap.
Are you doing that yet? If not, why? What do you think about the Dow’s fair value – is it 14,800? 13,000? 10,000? Or have stocks already declined enough to reflect the threats I just highlighted? These are hugely important questions, so please go visit the Money and Markets website and let me know what you think.
What will the Federal Reserve do next? What about the latest turmoil in China? And just how do I feel about stocks? That’s what everyone was talking about over at the website since yesterday.
Reader Frebon said the Fed needs to take action, rather than keep sitting on its hands. The comments: “The Fed raising rates is a good thing not a bad one. The Fed’s mandate has nothing to do with the market, only employment and inflation. They have failed on both with their current policies, as the published unemployment rate is a farce.
“They need to re-load their bullets if they will ever be able to help in the event of another recession. A Fed rate of 0.75% by year’s end should be their target, and 1.5% by June. Then they should re-assess the situation.”
Reader J.P.F. also said cheap money is causing more problems, rather than helping: “Haven’t we had enough of easy money, zero-interest rate policy? What’s the point of having a so-called ‘free market’ if marginal bets are not free to fail, as well as succeed in the market? As a saver, and longer-term investor, this past 10 years has certainly been a nightmare!”
But Reader Billy said raising rates is only going to make a bad situation even worse: “You almost get the feeling they are trying to help this deflationary storm grow stronger by the day (hidden agenda?). Look, the bottom line is we now have a perfect storm forming of growing deflation, massive toxic debt, crashing commodities, particularly oil/gas, a crashing Chinese economy and stock market, major technical and cyclical warning signs, and major geo-political problems ALL occurring simultaneously!”
As far as the impact of a hike or no hike, Reader Chuck B. offered this take: “Mike, you seem about as uncertain about the market direction as I am. The Fed seems to be inclined to push rates up a touch, anyway, while hoping that won’t cause a panic.
“I’m watching Larry’s charts, though, and if they seem to be turning out right, I’m holding back a few bucks to feed in when his big correction seems to be ending. And it is a correction – and overdue, at that, which may make it pretty scary. Perhaps we need a scare.”
Thanks for sharing, everyone. My view on the Fed is that policymakers clearly want to hike. They clearly should have already started hiking months ago, an opinion I laid out back then, and many others share.
But they have also shown that they’re slaves to the market. They’re scared of their own shadow, and basing policies that take several months to impact the economy off of a couple days’ trading in stocks and bonds. It’s no way to run an economy, but it’s how the Fed is doing things these days.
As for being uncertain about markets, I (respectfully) disagree. I have been ramping up my market warnings all summer here in Money and Markets. Literally DAYS before the Dow plunged almost 1,100 points at the open, I warned that “The bond market is screaming that stocks are toast.” A few weeks ago, I said central planners had lost control and that the “autopilot” market was over. And on Aug. 7, I said in no uncertain terms that I was “getting more cautions now than at any time in years.” That was more than 1,300 points ago on the Dow.
I went even further in my Safe Money Report, bagging multiple profits, cut a few losers, raised cash and hedged against declines. And I made the lion’s share of those moves before the big break in stocks.
And by all means, don’t miss the signals the various markets are sending out. Conditions are getting more volatile, and more treacherous to your wealth here. That’s why I believe protective action is warranted, and why I’m increasingly concerned the entire six-and-a-half-year bull market may be over.
Who doesn’t like a parade? Apparently, the Chinese do, because they’re about to celebrate the 70th anniversary of the conclusion of World War II with a massive display of military might.
The interesting thing now is that China is launching this celebration of its own magnificence at the same time its stock market, currency, and economy are slumping badly. So it’s doing all it can to artificially prop things up until the last tank rolls down the street – including new steps that make it more expensive for banks to bet against the Chinese yuan. But the country can’t fight the fundamentals forever.
Are central bankers out of bullets? That’s an argument I’ve been making for several quarters now, and the mainstream media is jumping on the bandwagon. Here’s just one example from the Financial Times, where the writer concludes:
“Several signs suggest loose monetary policy is increasingly proving ineffective, and central banks are failing to generate enough cyclical upswing to win against the structural forces constraining growth and inflation. Monetary stimulus alone cannot fix debt overhangs, low productivity, persistent unemployment, stagnant demographics and a lack of reforms and fiscal stimulus.”
Sounds about right to me – and that’s why I’ve been arguing that you need to take your financial future into your own hands, rather than count on Washington (or Frankfurt, or Tokyo, or …) to bail markets out anymore.
So what do you think? How concerned should we be about the major slowdown in China and elsewhere in Asia? Or about the fact central bankers are running out of bullets? Let me hear about it at the website.
Until next time,