It’s a world gone mad, folks — and U.S. stocks are paying the price! Just look at what the Dow Industrials did last week:
Up 167.35 on Friday.
|Dow||-41.93 to 17,071.22|
|S&P 500||-5.05 to 1,977.80|
|Nasdaq||-6.34 to 4,505.85|
|10-YR Yield||-.044 to 2.491%|
|Gold||+1.60 to 1,216.50|
|Crude Oil||+$0.89 to $94.43|
Down 264.26 on Thursday.
Up 154.19 on Wednesday.
Down 116.61 on Tuesday.
Down 107.06 on Monday.
That’s a string of five straight swings of 100 points or more, both up AND down. Then today, we sank more than 170 points right off the bat, before gaining roughly three-fourths of that decline back by the close!
Increased airstrikes in the Middle East. More sanctions and counter-sanctions in Russia and Eastern Europe. Slumping confidence and weak production in Western Europe. They’ve all contributed to the swings we’ve seen.
Then in the overnight session and early this morning, two more foreign events rocked the markets! Pro-democracy protests by students and workers in Hong Kong turned violent, with riot police resorting to tear gas and pepper spray to control tens of thousands of demonstrators in the former British territory. They want mainland China to avoid meddling in elections that will determine who governs Hong Kong in 2017 and beyond.
|Hong Kongers have taken to the streets of the city, furious that Beijing will no longer allow citizens to democratically elect their political leaders.|
Meanwhile, in Europe, the president of Spain’s Catalonia region Artur Mas is pushing for an independence referendum. Spanish Prime Minister Mariano Rajoy is firmly opposed to any referendum, even if the November 9 vote will technically be non-binding.
A showdown in the country’s constitutional court could ignite large protests or other unrest. And if Catalonia does secede, it would have large repercussions for Spain’s creditworthiness, and therefore the European bond and stock markets as a whole. The region is home to 7.5 million people and economic output of about $246 billion — roughly the same as Finland.
Set against this? More evidence the U.S. economy is just continuing to chug along. Personal income rose 0.3 percent in August and spending rose a greater-than-expected 0.5 percent. Inflation-adjusted spending posted the biggest rise since March. The only other minor indicator we got — the Dallas Fed regional manufacturing index — looked solid too, rising to 10.8 in September from 7.1 in August.
So where do things go from here? I’ve talked about the possibility the “Anchor Economies” overseas will drag us down. And I’ve been warning of a massive “Banker Brawl” breaking out on the policy and economic front, with potentially serious implications for your wealth.
I hope some of my investment guidance in those and other pieces has helped. Namely, avoid European stocks and the European currency … and stay focused on strong domestic stocks and sectors like energy, steel, health care and the like.
|“More evidence the U.S. economy is just continuing to chug along.”|
Suffice it to say the increased volatility is a potential yellow flag for the markets … but that it isn’t an all-out “sell” signal yet. To me, anyway.
How did your portfolio fare in recent days? Have you taken some of the steps I’ve been recommending, and have they worked out for you? Does the latest turmoil in Hong Kong or Europe tell you anything important about the markets … or do you think it’s just noise? Let me know your thoughts at the comment section below, and I’ll do my best to address them.
|Our Readers Speak|
When junk starts to head south, what does it MEAN for the markets? That’s the topic many of you weighed in on over the weekend.
Reader Tim Z. kept it short and simple: “Buy … SJB … short … JUNK BONDS.” SJB is the ProShares Short High Yield, an inverse ETF that’s designed to rise 1 percent for every 1 percent decline in the Markit iBoxx $ Liquid High Yield Index, a benchmark index of junk bond performance.
Reader Howard added that “On Friday 26th September, I reduced my exposure to risk by $1,000,000 and will now wait until I know what the hell is going on. The end of QE may give some more clues. Some of us read the tea leaves and others just drink the cool aide, but whatever your choice, it is soon going to get interesting.”
On the other hand, Reader Tom M. said he still sees a role for higher-risk, higher-yielding debt in his portfolio. His comments: “A lot depends on why you are invested in them. In my case, I have a significant amount invested in a ‘conservative’ junk bond fund, primarily for the monthly income it throws off.
“During the darkest time of the past few years, the fund’s value dropped as much as 40 percent (it has since recovered, and then some), but my monthly income never fluctuated more than 5-10 percent. I can live with that. As long as you are in it for the income, invest conservatively, and can live with fluctuations in market value, I think junk bonds STILL deserve major consideration in an income-oriented portfolio (i.e. for retirees).”
For me, it all comes down to value and yield. Snapping up junk bonds when everyone and his sister was dumping them back in the Great Recession was a home run trade. The yields they offered were sky-high, and the prices you had to pay were rock-bottom.
But these days, “high yield” bonds don’t offer high yields. They don’t even offer middling yields! I’d rather invest in select, high-quality stocks with nice dividends rather than overvalued, under-yielding junk bonds.
As always, thanks for your input everyone — and feel free to comment below!
|Other Developments of the Day|
- I’ve been bullish on U.S.-focused oil and natural gas drillers for some time now, and one just caught a major takeover bid! Encana Corp. (ECA, Weiss Ratings: C) of Canadasaid it would pay $7.1 billion including debt for Athlon Energy (ATHL, Weiss Ratings: C) to gain access to Athlon’s acreage in the Permian Basin region of West Texas. The $58.50 per share bid represents a 25 percent premium to where ATHL closed on Friday.
- When PIMCO CIO Bill Gross left the firm last week, some $10 billion reportedly walked out the door along with him! Tens of billions of dollars more could bleed out of the firm in the coming weeks, potentially weighing on portions of the bond market.
- This airline situation in Chicago is becoming a giant mess! Another 400 flights at Chicago’s O’Hare International Airport were cancelled this morning, the fourth day in a row of cancellations that now total almost 4,000. A contract worker set fire to a regional air traffic control facility, which sabotaged the FAA’s ability to manage flights in and out of the incredibly busy airport.
- I’ll be traveling to Europe in early November to present my worldview to readers of our German-language Safe Money publication. So the ongoing collapse in the value of the euro is music to my ears! After all, it means my dollar will go further and I’ll have more spending money.
How far could the euro fall? Well, we just breached 1.27 to the downside (versus a spring peak of 1.40). The next major support area is down around 1.20 … and it would be a HUGE deal if that couldn’t hold.
Reminder: You can let me know what you think by putting your comments below.
Until next time,