Worried about the stock market yet? Perhaps you should be. The price of stocks always reflects both the current business economy – and the outlook for future growth. Now that outlook has changed. The possibilities of a global economic slowdown – recession – just increased dramatically as the trade wars took a more dangerous turn.
China decided it would respond to the President’s latest threat of additional 10 percent tariffs, by letting its currency decline in value. The Peoples Bank of China, essentially an arm of the Chinese government, has been “supporting” the value of the Chinese currency at a level of 7:1 against the U.S. dollar. Clearly, the Chinese central bank’s support has now been withdrawn to some extent.
A weaker currency means Chinese exports are cheaper. As the U.S. dollar strengthens against the Chinese Renminbi – the official name for the Chinese currency — it means one American dollar can buy more Chinese products. And that creates bargains for American consumers, as well as offsetting the higher prices created by tariffs. The weaker Chinese currency will keep their export business growing.
The action isn’t all positive for China. Many of their companies owe money in dollars, and so will have to use more Renminbi to repay those loans. The Chinese import oil, which is always priced in dollars. So it will take more Renminbi to buy the oil imports. These higher costs will hurt the Chinese domestic economy – and potentially create an economic slowdown there. And that slowdown would definitely impact global business, and profits, and earnings.
It’s a dangerous game, because China has a lot to lose. But one thing they don’t have to lose is an election! As I’ve noted before in my columns, the Chinese have had 500 years to learn patience and privation. Contrast that with America, which tends to vote its “pocketbook” at elections held every two years.
A recession caused by trade wars instigated by the party in power will not sit well with an electorate that is losing jobs in a recession. And the falling stock market is merely a reflection of those future possibilities of a U.S. and global economic slowdown.
That slowdown is likely to hit Europe even harder than the United States. And Europe would have few ways to counteract such a recession. Most of their country debt is already at negative interest rates – more than $13 trillion. That means people and businesses are so afraid of the future that they are paying the banks to hold their money for safety!
The German 10-year government bond already yields a negative 0.50 percent. The comparable 10-year U.S. Treasury bond has fallen to a yield well under 1.75 percent. If a global recession were to occur, the world’s central banks would have little room to cut rates, which is the traditional way to stimulate growth.
During an incredible 10-year bull market, stocks have outperformed all other assets. But so far this year, gold has soared nearly 15 percent, reflecting global fear that financial markets are in trouble.
Yes, over the long run, the stock market has had a 10 percent annual return, with dividends reinvested. But the long run is at least 20 years. And for ten of the past 20 years, the stock market has outperformed. It won’t be surprising to find it underperforming in the next ten years.
Can you afford to ride it out? Do you have the self-discipline to ride out a major decline? Decide right now!
According to Jim Stack of Investech Research (www.Investech.com) there have been 15 bear markets since 1929. The average decline from peak to bottom was 37 percent. But the bear market of 2007, saw the S&P 500 decline 57 percent. The bear markets of 1973 and 2000 took the S&P 500 down more than 50 percent each.
Of course, the market eventually rebounded. It always does. But it could take some time. After the bear market of the early 1970s, it took more than a decade for the major averages to recover.
If you were a regular investor, continuing to contribute new money to a mutual fund during those years, you bought stocks at bargain prices – and eventually profited from a rebound. But if you “needed” the money and were forced to sell, you took a substantial – and permanent – loss.
So that’s the challenge for stock market investors today. What’s your time horizon? And what’s your risk tolerance? I’ve been asking you to consider that for more than a year. It’s a little late to find out now. But not too late. And that’s The Savage Truth.