Stock Market Plunges Again – Global Stocks Down 5 Weeks In A Row – 8 Trillion Dollars In Wealth Wiped Out
26 October, 2018
It’s not over. The worst October stock market crash since 2008 got even worse on Friday. The Dow was down another 296 points, the S&P 500 briefly dipped into correction territory, and it was another bloodbath for tech stocks.
On Wednesday, I warned that there would be a bounce, and we saw that happen on Thursday. But the bounce didn’t extend into Friday. Instead, we witnessed another wave of panic selling, and that has many investors extremely concerned about what will happen next week. Overall, global stocks have now fallen for five weeks in a row, and during that time more than 8 trillion dollars in global wealth has been wiped out. That is the fastest plunge in global stock market wealth since the collapse of Lehman Brothers, and it is yet another confirmation that a major turning point has arrived.
The Dow Jones Industrial Average closed 296.24 points lower at 24,688.31 after dropping 539 points at its lows of the day. The Nasdaq Composite dropped 2.1 percent to 7,167.21. At its lows, the tech-heavy Nasdaq had fallen more than 3 percent.
The S&P 500 fell 1.7 percent to 2,658.69 and briefly entered into correction territory, trading more than 10 percent below its record high reached in September. The average stock market correction, since WWII, results in a 13 percent drop and lasts for four months if it does not turn into a full-fledged bear market.
Larry Benedict, CEO of The Opportunistic Trader, said traders “don’t want to be long heading into the weekend.” He added, “S&P now down on the year and people are more afraid to be long today than they were when market was 10 percent higher.”
Nearly 40 percent of Americans said they were “anxious” about stock market volatility, according to Allianz Life’s 2018 Market Perceptions study, mainly because they worried they would not be able to protect their retirement savings.
Experts say big sell-offs are often a good time for investors to double down on their investments. One recommended looking for companies that are expected to post healthy gains in sales and earnings. A strong balance sheet and a steadily growing dividend don’t hurt either.
“With earnings season in full force, this is when stock pickers can add a lot of value,” said Ernesto Ramos, managing director of active equities with BMO Global Asset Management. “There really was no good reason for the market to be down as much as it was Wednesday.”
THIS TIME IS DIFFERENT - THE BEGINNING OF THE GREAT COLLAPSE
26 November, 2018
The largest asset bubble in the history of our planet is approaching the end of its lifespan, but that’s just the opening act. This time is different.
Few imagined how far the Fed would go to reinflate the economy in the wake of the 2009 crisis. It started with TARP, then “quantitative easing” QE1, QE2, and QE3. To stave off the last crisis the Federal Reserve slashed interest rates to zero and bailed out the banks by buying up 4.5 trillion of dollars of their distressed assets. At its peak the Fed was spending 40 billion on mortgage backed securities a month. This buying spree continued until October 29th, 2014.
Most of these distressed assets are still on the books (see chart below). The fed began gradually selling these securities in 2017 at a rate of 9 billion per month and has continued into 2018. The unwinding of the fed balance sheet has the exact opposite effect as quantitative easing, in fact economist refer to it as quantitative tightening. It reduces the amount of liquidity (available cash) in the system.
Now some speculate that the fed may be forced to halt the unwind process or even reverse course.
To further complicate matters, the federal reserve began gradually increasing interest rates in 2015, and has yet to bring them back to pre-crisis levels. Recent statements indicate that the fed is unlikely to stop raising interest rates in response to recent market volatility. Like quantitative tightening, increasing interest rates has the effect of reducing liquidity.
By itself, the tightening of monetary policy at the beginning of a stock market downturn presents a fundamentally different dynamic than was seen when the dot com bubble burst in 2001, or the housing bubble burst in 2007. The fed was positioned to slash rates in each of those cases, effectively injecting the system with cheap credit. This time around the fed has no ammunition. Don’t take my word for it. Just ask former Dallas Fed president Richard Fisher.
Trump just started a trade war with China. This showdown is in its early stages, and is set to escalate. The full effects haven’t even begun to be felt yet.
This time really is different.
To be continued…